Bogomil Ferfila - Friedrich-Ebert-Stiftung Zagreb / Kroatien

POLITICAL PROCESSES AND INSTITUTIONS COLLECTION

Faculty of Social Sciences
University of Ljubljana, Slovenia
Friedrich-Ebert-Stiftung, Berlin, Germany
Bogomil Ferfi la and Stefan Dehnert
(Eds.)
GERMANY AND SLOVENIA:
Socioeconomic
and Political Approaches
2012

Bogomil Ferfi la and Stefan Dehnert (Eds.)
GERMANY AND SLOVENIA:
SOCIOECONOMIC AND POLITICAL APPROACHES
Peer Reviewers prof. dr. John Loxley, prof. dr. Lance LeLoup
POLITICAL PROCESSES AND INSTITUTIONS COLLECTION
Published by Faculty of Social Sciences, University of Ljubljana, Slovenia
Friedrich-Ebert-Stiftung, Berlin, Germany
Head of the Publishing House Hermina Krajnc
Copyright © FDV 2012, Ljubljana. All rights reserved.
No part of this publication may be photocopied or distributed.
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327(430:497.4)
GERMANY and Slovenia : socioeconomic and political approaches /
Bogomil Ferfi la and Stefan Dehnert (eds.). - Ljubljana : Faculty of
Social Sciences ; Berlin : Friedrich-Ebert-Stiftung, 2012. -
(Political processes and institutions collection)
ISBN 978-961-235-438-1 (Faculty of Social Sciences)
1. Ferfi la, Bogomil
257246208

Contents
GERMANY AND SLOVENIA TOGETHER ........................................................................................ VII
GERMANY .......................................................................................................................................... 1
GERMAN POLITICAL SYSTEM AND PARTY POLITICS .......................................... 3
GERMANY: UNITED, RICH, UNHAPPY (Michael Ehrke) .............................................................
REPORT AND RECOMMENDATIONS OF THE SPD’S WORKING GROUP
5
ON THE FUTURE OF THE PARTY AS A MEMBER ORGANISATION (German SPD) ....... 20
THE GERMAN ELECTIONS: CONSEQUENCES FOR THE SPD (Thorben Albrecht) .........
THE SPD AND THE DEBACLE OF THE 2009 GERMAN FEDERAL ELECTIONS:
35
AN OPPORTUNITY FOR RENEWAL (William E Paterson and James Sloam) ........................ 41
GERMAN ECONOMY – GLOBAL ECONOMY –
WORLD ECONOMIC CRISIS .........................................................................................................
CONTROLLING THE RISKS OF A GLOBAL ECONOMY
49
(Michael Dauderstädt & Christian Kellermann) ................................................................................. 51
WORLD ECONOMIC CRISIS AND THE WELFARE STATE (Klaus Busch) ............................ 67
A NEW START IN ECONOMIC POLICY (Friedhelm Hengsbach) ................................................ 95
A PROTECTIVE SHIELD FOR JOBS .....................................................................................................
LABOUR MARKET AND EMPLOYMENT IN GERMANY – THE SPREAD OF
101
“NON-REGULAR” EMPLOYMENT AND ITS CAUSES (Werner Kamppeter) .........................
THE LOW WAGE DEBATE IN GERMANY: ARE THERE WAYS OUT OF
103
THE POVERTY TRAP? (Michael Dauderstädt)................................................................................... 118
RELIGION AND POLITICS IN GERMANY ......................................................................... 123
RELIGION AND POLITICS (Thomas Meyer) ..................................................................................... 125
PERSPECTIVES OF GERMAN IMMIGRATION POLICY (Steffen Angenendt) ......................
THE INTEGRATION OF YOUNG MALE MUSLIMS IN GERMANY EDUCATION
138
AND TRAINING AS KEY AREAS FOR SOCIAL INTEGRATION (Frank Gesemann) ......... 147
MUSLIM CHILDREN AND THE “RIGHT TO RELIGION” (Friedhelm Kraft) ....................... 167
DEMOCRACY – GERMANY – EUROPEAN UNION ...................................................... 181
DEMOCRACY IN THE ASCENDANT? (Marika Lerch) .................................................................. 183
GERMAN FOREIGN POLICY AND THE GRAND COALITION (Stefan Mair)......................
GERMANY IN INTERNATIONAL RELATIONS – AIMS, INSTRUMENTS,
200
PROSPECTS (Jochen Steinhilber) ............................................................................................................
THE EUROPEAN UNION: PROTAGONIST IN A MULTILATERAL WORLD ORDER
203
OR PERIPHERAL POWER IN THE »ASIA PACIFIC« CENTURY? (Dirk Messner) ................. 304
ON THE WAY TOWARDS A EUROPEAN ARMY (Hans-Peter Bartels) ...................................... 316
V

GLOBAL SECURITY AND GERMAN POLICIES ..............................................................
PREVENTION AND SUPPRESSION OF ORGANISED CRIME
325
(Richard Mörbel & Sonke Schmidt) ........................................................................................................
ON A NEW MISSION
THE FOREIGN MISSIONS OF THE BUNDESWEHR AND GERMAN
327
SECURITY POLICY (Stefanie Flechtner) ............................................................................................... 345
TERRORISM IN THE 21ST CENTURY (Peter R. Neumann) ........................................................... 365
CRISES AND WARS IN TIMES OF GLOBALIZATION (Michèle Auga) .................................... 380
GERMANY AND GLOBAL POLITICS .....................................................................................
TOO MANY OR TOO FEW: DEMOGRAPHIC GROWTH AND INTERNATIONAL
401
MIGRATION (Ernst Hillebrand) ............................................................................................................. 403
HUMAN RIGHTS AND INTERNATIONAL SOCIAL POLICY (Erfried Adam) ......................
GLOBAL HEALTH – A POLICY FIELD OF UNDERESTIMATED
421
IMPORTANCE (Wolfgang Hein) .............................................................................................................. 450
ENERGY SECURITY (Dietmar Dirmoser) ............................................................................................ 466
SOLAR ENERGY IN GERMANY ............................................................................................................ 498
INTERNATIONAL CLIMATE POLICY 2020 (Ott, Hermann E.) .................................................. 504
SLOVENIA........................................................................................................................................... 525
SLOVENIAN ECONOMIC AND POLITICAL DEVELOPMENT
(Bogomil Ferfi la and Paul Phillips) ........................................................................................................ 527
CHAPTER 1
THE ECONOMIC DEVELOPMENT OF SLOVENIA:
BEFORE THE NATION STATE (6 TH CENTURY B 1991) ................................................................. 529
CHAPTER 2
TRANSITION AND ECONOMIC DEVELOPMENT IN SLOVENIA:
THE FIRST DECADE OF INDEPENDENCE ..................................................................................... 548
CHAPTER 3
THE TRANSFORMATION OF INSTITUTIONS:
THE DEVELOPMENT OF CORPORATISM IN SLOVENIA ......................................................... 563
CHAPTER 4
MONETARY AND EXCHANGE RATE POLICY DURING SLOVENIA’S TRANSITION .... 577
CHAPTER 5
LABOUR AND THE TRANSITION: PART I:
UNIONS AND THE EVOLUTION OF A NEW INDUSTRIAL RELATIONS ........................... 591
CHAPTER 6
LABOUR AND THE TRANSITION: PART II ...................................................................................... 618
CHAPTER 7
THE POLITICAL ECONOMY OF THE SLOVENIAN TRANSITION: 1945-2004 ...................... 649
CHAPTER 8
POLITICAL CHANGE AND FISCAL POLICY:
THE ROLE OF THE BUDGET IN THE SLOVENIAN TRANSITION ........................................ 662
CHAPTER 9
SLOVENIA AND THE EU: THE ACCESSION .................................................................................... 669
AFTERWORD: SLOVENIA IN THE EU ................................................................................................ 682
ECONOMIC TRANSFORMATION OF SLOVENIA -
GRADUAL REMOVAL FROM GRADUALISM?! (Miriam Goetz) ................................ 707
VI

Grußwort des Botschafters für das neue Buch „Germany and Slovenia: Socio-economic
and Political approaches“ von Prof. Ferfi la ( Studiengang „Deutschlandstudien”)
GERMANY AND SLOVENIA TOGETHER
Germany and Slovenia enjoy excellent political and economic relations. Germany
is proud to be the greatest export partner of Slovenia. The relationship between both
nations is pandered not only by this fact but is based on cordial terms within various
other domains.
Germany has a long and varied history. Looking at the younger history, after the
second world war two separated nations where established: The Federal Republic of
Germany in the western part and the German Democratic Republic in the eastern part
of the country. The separation of the two parts of Germany culminated in the construction
of the “Mauer” 40 years ago on August 13 th , 1961. In 1989 a peaceful revolution
put an end to the regime of the GDR and both German states were reunifi ed in 1990.
In 2011 Germany and Slovenia celebrate 20 years of diplomatic relations. Germany
was the fi rst country to recognize the newly founded Republic of Slovenia briefl y
after its declaration of independence in 1991. During the following period Slovenia
developed fast to become a stable international partner within the EU, NATO and the
OECD. Within only twenty years both countries have become strong partners and
numerous events consolidated this young but solid relationship. The latest highlight
was the working visit of the Chancellor of the Federal Republic of Germany, Dr. Angela
Merkel, to the Republic of Slovenia on August 30, 2011.
Today we are working closely together as partners in the European Union and members
of the Eurozone. We are joining forces when it comes to dealing with the major
challanges of the future: globalization and sustainable development, climate change and
energy security..
In times of globalization education is becoming more and more relevant for the
progress and wellbeing of our countries. This includes the enhancement of foreign language
skills of young people. Education and sciences are one of the core topics of the
German government. I am pleased that the numbers of students and teachers who are
willing to take part in exchanges to Germany and Slovenia has signifi cantly increased
within the last ten years and I am expecting that this process will continue.
This textbook presents useful and comprehensive topics concerning both Germany
and Slovenia not only for students of the master programme „German Studies“ but also
for anyone who is interested in history, development and singularities of Germany,
Slovenia and the German-Slovenian relations.
September, 2011
Werner Burkart
Ambassador of the Federal Republic of Germany to Slovenia
VII

GERMANY

German Political System
and Party Politics

GERMANY: UNITED, RICH, UNHAPPY
MICHAEL EHRKE
This article authored by Michael Ehrke was originally published
by Friedrich-Ebert-Stiftung, International Politics and Society, Bonn, 2007
The timing of new centuries and millennia and the objective division of history into
epochs rarely coincide. According to Eric Hobsbawm, the »short« 20th century began in
1914 and ended in 1989. 1 Here, Hobsbawm’s defi nition of 1989 as the threshold of a new
epoch is moreS than just the judgment of a historian made after the event. Whilst only a
few contemporaries probably experienced 1914 as the end of an epoch – as the end of the
»long« 19th century – 1989 was immediately seen by the whole world as a turning point
which divided history into before and after. The following remarks, which are made on
the occasion of a new millennium, refer more to the signifi cance and the consequences of
1989 and aim less to assess the entire century, let alone the millennium.
1989 saw the end of the state in Germany known as the GDR and the beginning of
German reunifi cation. It is no coincidence that the whole world associates the end of the
post-war order not with the electoral victory of Solidarnosc in Poland in the summer of
1989, but with the fall of the Berlin Wall that autumn. The image of the people dancing on
the Wall has become the icon of the end of the epoch. German reunifi cation is a sort of
miniature edition of that larger process of integration which started to bring the former
communist countries in central and eastern Europe into the global market system and the
political community of the West. It is a piece of »globalization«, and has brought changes
throughout Germany. However, whilst people in the western part of Germany have only
experienced or will experience these changes as a very gradual process, the citizens of
the former GDR have gone through this process in a very short period – even ahead of
the western Germans. German reunifi cation resulted in the normalization of the international
status of Germany, a country which had enjoyed only limited sovereignty before
1989. It also created the preconditions for a continuation of European integration into an
economic and monetary community. At the same time – and this is the point at the core
of the following remarks – it overrides, distorts and intensifi es the country’s internal socio-economic
development as it experiences a transition from a Golden Age of economic
prosperity and social consensus into something which is at most vaguely defi ned, which
due to a lack of precise defi nitions we might term post-industrial society, second modern
age, or knowledge-driven service society.
A GERMAN CENTURY
For the western part of Germany, the second half of the 20th century (1949–1989) was a
period of good fortune. There was no war, no civil war, no manifest restriction of freedom,
no signifi cant infl ation, no signifi cant economic crisis. As a result of an extremely dynamic
economic development, the western part of Germany had already become the third-largest
1 Eric Hobsbawm, The Age of Extremes. A History of the World 1914–1991, Vintage Books 1996.
5

economic power and the second-largest exporter in the world prior to reunifi cation. People
may complain about a lack of competitiveness in Germany, but German fi rms supply the
world with high-grade machinery, telecommunications equipment, cars and chemicals. It
can be said with some justifi cation that an average German worker enjoys a higher quality
of life than his Japanese equivalent, even though he works 48 days less a year on average,
and that an unemployed German has a better life than one of America’s working poor. Germany’s
universities lag behind the top US institutions, but the skills level of its workforce is
on average higher than that in the Anglo-Saxon countries. Germany’s cities and landscapes
are less damaged by industry than those of Japan, and its crime rate is far lower than that of
the United States. Hardly anyone emigrates, but hundreds of thousands or millions would
like to live and work in Germany – if they were allowed in. Those people who lived in West
(or in the last decade in reunifi ed) Germany were, compared with the vast majority of the
population of the planet, favored by fortune.
Table 1:
Non-war-related victims of state violence in the 20th century
Regime Number of victims Duration
Soviet Union (Communist) 61,900,000 1917–1990
China (Communist) 35,200,000 1949–present
Germany (Nazi Third Reich) 20,900,000 1933–1945
China (Kuomintang) 10,400,000 1928–1949
Japan (Imperial-Fascist) 6,000,000 1936–1945
China (Communist Guerrillas) 3,500,000 1923–1948
Cambodia (Communist) 2,000,000 1975–1979
Turkey (»Young Turks«) 1,900,000 1909–1917
Vietnam (Communist) 1,700,000 1945–present
Korea (Communist) 1,700,000 1948–present
Poland (Communist) 1,600,000 1945–1948
Pakistan (Yahya Khan) 1,500,000 1971
Mexico (Porfi riato) 1,400,000 1900–1920
Yugoslavia (Communist) 1,100,000 1944–1990
Russia (Tsarist) 1,100,000 1900–1917
Turkey (»Ataturk«) 900,000 1918–1923
United Kingdom (Democratic) 800,000 1900–present
Portugal (Fascist) 700,000 1926–1975
Croatia (Fascist) 700,000 1941–1945
Indonesia (Suharto) 600,000 1965–1999
This favorable and exceptional situation is particularly striking if one compares the
second half of the century with the fi rst. Anyone who was born just a few years too early
in Germany had to experience defeat in two world wars, a failed revolution, two periods
of hyperinfl ation, a severe economic depression, three changes in the political system
and, above all, probably the most thorough murderous regime in history – all in the
space of the fi rst thirty years of the »short« century. Rarely has a nation’s century been
so clearly divided into two halves by one year – 1945 – the fi rst of which will for all time
overshadow the entire century as an epoch of mass murder. Germany was not only dis-
6

proportionately involved in the century of mass murder, it was a leading protagonist. In
wars against the rest of the world, it produced wonders of technology and organization
which put all earlier wars in the shade. But above all, Germany brought a new dimension
to the mass murder of civilians quite unrelated to the military campaign. In his economic
history of the 20th century, Brad DeLong quoted an estimate of the presumed victims of
state-sponsored violence in the 20th century (note: not as part of military action). The top
twenty regimes here, according to his estimate, produced more than 155 million victims.
DeLong concedes that many of these fi gures are just rough estimates, and can do no
more than indicate the dimensions involved. National Socialist Germany only takes third
place on this list, but given the brief duration of National Socialist rule, it proves to be
the most murderous regime of a murderous century. Above all, for National Socialism the
mass annihilation was not the accepted consequence of a political program, no matter
how absurd that program was (as in the disastrous starvation caused by the state in the
Soviet Union and China): it was the program itself. And it took place not in a situation of
backwardness, underdevelopment and disorganization, but was managed using state-ofthe-art
industrial technology and administrative organization; it was the responsibility of
a nation at the forefront of technology and commerce – and for that reason the century
of mass murders will for all time be associated with Germany.
The turning points of the 20th century – 1914, 1945 and 1989 – are »German« years.
One can debate who started the war in 1914, but there is no denying that Imperial Germany
took the lead in correcting the order of the 19th century by force and thereby drove
the world into a war which consigned to the scrapheap all the optimistic assumptions of
the 19th century about civilization and progress. The military defeat and partition of Germany
in 1945 was the precondition for the establishment of a new bipolar world order,
symbolized by the border between the two Germanys. The Golden Age of the post-war
decades enabled part of humanity to enjoy unparalleled prosperity, but the Golden Age
was also overshadowed by the ever-present threat of the destruction of civilization by a
nuclear war. The bulk of humanity paid the price of the proxy wars of the superpowers,
languishing in poverty, stagnation and political oppression. Finally, 1989 and the fall of
the Berlin Wall placed Germany in the forefront of world history for one last time.
When the current position of Germany in Europe and the world is defi ned, the word
»normal« predominates. That cannot imply that a line can now be drawn under the past:
the past will not disappear, the terrors of the National Socialist mass destruction have not
faded with time; in fact, the more German society is able to describe itself as civilized in
the Western sense, the more obscene these terrors become. The past does not die away
with those who experienced it, be they perpetrators or victims. The historians’ dispute,
the Goldhagen debate, the Wehrmacht exhibition and the arguments about compensation
for slave laborers show that the debate on coming to terms with Germany’s past will
not cease or die down. Normalization can therefore only be meant in a more harmless
sense: Germany has become a normal Western country whose elite no longer aspires to a
separate path and a revision of the world order by force. It may be that one can read fresh
ambitions to become a major power into the words of German politicians or the cover
stories of news magazines, but this is more a question of form than a genuine project; in
any case, the country would not have the resources for such a project, even if it aspired
to it. Germany is economically integrated and in a security alliance with most of its nine
immediate neighbors; as former Defense Minister Volker Rühe put it, it is »encircled by
friends«. In 1999, Germany participated in a war for the fi rst time since 1945 – a rather
7

dubious mark of normalization – but the German involvement in the war in the Balkans
was interpreted by its neighbors not as the rebirth of a military monster, but as a sign of
a rejection of any separate path, even that of a pacifi sm legitimized by the past. The war
in the Balkans was not a »German war«, and it seems reasonable to hope that the 21st
century will not be a »German century«.
8
BEFORE REUNIFICATION: OLD AND NEW SOCIAL ISSUES
The second half of the 20th century was a Golden Age for the western part of Germany.
A growing economy, (generally) full employment, social security and a dramatically rising
standard of living for (almost) everyone resulted in a virtuous circle which – not wholly
unjustly – was presented as the »German model«. The core elements of the model were
a high (by international standards) level of insurance for workers against the risks of unemployment,
illness and lack of income in old age, rapidly rising wages, and a consensus
resolution of industrial disputes. The social market economy of the 1950s and 1960s was
not an egalitarian economic model, but it did at least give the justifi ed impression that the
capitalist market economy (and the inequality inevitably linked with it) was compatible
with social justice. The dynamism of the prosperity – the prospect that everyone would be
able to obtain more and more and better and better consumer goods – meant that the static
inequality in the distribution of income and wealth was of rather secondary importance.
The participation of the vast majority of the population in a continuously rising level of
consumption was matched on the production side by the participation (albeit subordinate)
of a large minority of workers in corporate decision-making processes, either in the form of
institutionalized rights of codetermination, or in the form of informal code-termination on
the production site, particularly by the skilled workers.
As far as the socio-economic situation in West Germany was concerned, one thing at
least was clear when Germany reunifi ed: the Golden Age was over. It is hard to tell where
the cut-off point was. The fi rst oil crisis signalled that the epoch of prosperity and social
justice would not be indefi nite. But a genuine turnaround only came in the early 1980s.
The change in government from a social-democrat/liberal to a christian-democrat/ liberal
coalition did not have the revolutionary dimensions of the neoliberal government takeovers
in the United States and Britain, but it too marked a transition: the early 1980s saw
the onset of a concentration of income and wealth 2 – following years when the pattern of
distribution of income and wealth in West Germany had slowly but steadily improved.
Back in the days of the social-democrat/ liberal coalition, the CDU had already discovered
the »new social question« (Heiner Geissler had thus anticipated Tony Blair fairly
precisely). The old battle line between workers and employers, as maintained by the
social democrats, was, it was argued, overridden by a far more dramatic split between
those who formed part of the system as workers or employers, and an underclass of
the excluded without any access to the working world and the welfare state. On the
Left, both inside and outside the SPD, the term »two-thirds society« was coined. Both
concepts defi ne exclusion as the status of a minority which had been shut out of an established,
functioning and consensus-based majority society. They refl ect a new reality
for the Federal Republic: mass unemployment and, as a consequence, unemployment as
2 Cf. Richard Hauser, Die Entwicklung der Einkommensverteilung und der Einkommensarmut
in den alten und neuen Bundesländern, in: Aus Politik und Zeitgeschichte 18, April 30 1999.

a fate which, for more and more people, was no longer a more or less brief interruption
between two periods of employment, but dominated large parts of active life. The »new
social question«, or the excluded »one-third«, included not only the »structurally« unemployed,
especially younger and older people who were unable to get a foothold in or had
lost contact with the labor market, but also a growing group of people whose problems
were covered by neither labor law nor the welfare state: those in precarious, temporary
employment or in quasi self-employment, single mothers, large families, foreign workers,
people in social ghettos, marginal groups.
The treatment of the social question as a minority issue placed the majority of those
in regular employment and with social security cover at least implicitly on the side of the
privileged. Their organizations, the trade unions, apparently took little interest in the fate
of the excluded and even fought tooth and nail to defend the privileges of their clientele
against the claims of the disadvantaged minority. Since the decisive line of battle was
defi ned not as employer against worker or rich against poor, but as the confl ict between
an excluded minority and a privileged majority of workers and employers, the tensions
within this majority society were presented as secondary disharmonies within a generally
harmonious community.
It was not until later that attention focused on two parallel developments. Firstly, the
involuntary social exclusion of an underclass corresponded to the increasing voluntary
self-exclusion of the elites, i. e. the high-earners and the wealthy. This self-exclusion is
a consequence of globalization: due to the policy of deregulation since the early 1980s
it has become increasingly easy for the possessors of capital and highly-valued skills
to transfer their resources across national borders to wherever the yield is highest and
the burden smallest. This is just as true of companies as it is of chemists with money to
invest or of tax-evading TV stars. The motto of West German social partnership: »We are
all in the same boat«, ceased to apply. Firstly, this had an impact in the companies. The
»German model« had been a positive-sum game for all those involved; it could have been
described as »high wages, high productivity, high profi ts« (one might add »high skills,
high motivation, high quality«). The consensus in the 1970s was that this was the magic
formula for the international success of German industry. But if the consensus between
employers and workers starts out as something with a limited shelf life, i. e. the implicit
social contract should only apply until a combination of productivity and wage costs is
found somewhere else in the world which permits even higher profi ts, then the corporate
basis for the consensus is systematically undermined. The employers would no longer
need the corporate consensus. The pressure of unemployment then automatically creates
the motivation for the workers who continuously face the threat of redundancy, a motivation
which previously had to be generated by monetary incentives and participation in
corporate decisionmaking. Secondly, the exit option for companies is not only available
at any time, but can also be fed into the wage negotiations, which thereby lose their character
of a contest between more or less equals (the withdrawal of larger companies from
the business associations representing them in wage negotiations and thus their voluntary
renunciation of the basis of confl ict resolution and consensus formation is only one
aspect of a process whereby companies are fundamentally distancing themselves from
the community of which, in formal terms, they are still part).
The more signifi cant impact affects the political system. A democratic political order
is not based on all citizens sharing the same values and convictions; it rests on a political
process in which differing and confl icting interests are talked through and solutions dis-
9

cussed in public. The model of the social market economy started from the assumption
that the market alone would not create an acceptable distribution of income and opportunities
in life, and that the distribution achieved by the market could be and had to be
corrected by government. A prerequisite for social cohesion was that, despite inequalities,
all the participants could be convinced that the process was more or less »fair«. The
defi nition of what is regarded as »fair« in different situations is a matter for the political
process (in a wider sense, i. e. including collective wage negotiations, mass action, media
debates, etc.). But if the earners of high salaries and the owners of large assets no longer
need to negotiate, but can always enforce their interests by referring to the exit option
and/or can withdraw their resources from common availability, the nature of the public
political process changes too. In the self-referential language of politics, this is described
as a »loss of scope for policy-making«. The commonweal of the social partners, who are
forced to reach a consensus or to go under, is replaced by a relationship between the
blackmailers and the blackmailed (and government and the media react like those being
blackmailed and warned not to contact the police) – or a relationship between two
groups in society which no longer belong to the same political community. It is the vast
majority of people in dependent employment who not only have to bear the burdens of
social solidarity (of the welfare state) and thus of social cohesion; and it was also the
people in dependent employment who had to pay for the costs of German reunifi cation
(whilst companies and the wealthy profi ted from the tax and depreciation paradise created
in eastern Germany). The self-exclusion of the elites creates two communities: a
business class of the internationally mobile and a tourist class of the less privileged who
continue to be reliant on their state.
This is true of the second development described here: the situation of the majority
of de- pendent employed who are (still) covered by welfare insurance. On the one hand,
the owners of capital and the high earners are withdrawing their resources from the commonweal;
the tax base is shrinking. Taxes on capital have been declining ever since the
1960s, whilst taxes on labor have kept increasing. 3 On the other hand, more and more
people end up – occasionally voluntarily, but mostly involuntarily – in a situation in
which they are unable to pay any more welfare contributions and, sometimes, taxes. In
statistical terms, this relationship is expressed in the displacement of regular jobs subject
to social insurance contributions by precarious jobs and by open or concealed unemployment.
The majority of workers (still) insured for welfare run the risk of fi rstly becoming
a minority themselves, which secondly has to fi nance the welfare benefi ts for a growing
proportion of the population out of its incomes, whilst thirdly the assets of capital owners
or higher earners are withdrawn from the system. Those in dependent employment
then also have to bear the costs of unemployment (for example) in more than just fi nancial
terms: they also bear all the risks resulting from rationalization and relocation by
companies and, assuming they actually retain their jobs, the increasing burdens deriving
from the sy- systematic »downsizing« of companies. It has therefore proved impossible
to reduce the social tensions of the pre-reunifi cation Federal Republic to the problem of
the exclusion of a minority (the »one-third«). And the »old social question« of confl ict
between workers and employers, which appeared to have been consigned to the past in
the decades of the Golden Age, fl ared up again during the 1980s and 1990s.
3 Cf. Dani Rodrik, Has Globalization Gone Too Far? Washington, Institute for International
Economics 1997, p. 65.
10

COMPETITIVENESS AND SOCIAL ENVIRONMENT
People in Germany have come to believe that prosperity, social achievements and
consensus in society are under threat. Two opposing stances have crystallized out of
this: on the one hand, those who think that Germany has become uncompetitive stress
that the country »is living beyond its means« and needs »to tighten its belt«. In intensifi
ed global competition, the nation’s prosperity is threatened by other, better equipped
countries. If it proves impossible to make Germany »fi t for globalization«, the country is
at risk of »being relegated to the second division«. This criticism refers both to objective
data, which basically refl ect the costs of commercial activity, and to collective dispositions.
In nominal terms, wage costs are the highest in the world and are negotiated infl exibly
at sector level rather than in line with the performance of the individual company.
Nominal corporate taxation and the public-sector share of GDP are high, there are too
many rules and regulations, education and training take too long, training fails to meet
the needs of companies – etc. As far as the collective dispositions are concerned, a too
tightly meshed welfare net rewards free-riders, inertia, infl exibility and immobility whilst
penalizing performance, risk-taking and entrepreneurial vigour.
The economic substance of this line of criticism is at best threadbare: national economies
do not compete like private-sector companies in an international competition which
needs to be seen as a zero-sum game – and if they did, Germany would hardly be on the
losing side, since there are at least no indications of declining terms of trade which would
refl ect a deterioration in the sectoral economic structure in the international comparison.
The corporate taxes actually paid in Germany are, according to the OECD, below the average
for industrial countries, including Britain and the United States, the level of wages
needs to be seen in relation to labor productivity, the level and length of training needs
to be considered in an international comparison. The German economy has continued
to grow during the last twenty years; it is richer today than at the beginning of the 1980s.
There is no empirical proof that the Germans are living »beyond their means« and need
»to tighten their belts«. The phrase which keeps cropping up, that the retention of the
welfare state, let alone its expansion, is impossible, since there is »no wealth left to redistribute«
is daft: due to the concentration of incomes and property, there is more wealth
and more poverty than in the late 1970s, i. e. there is both more wealth to be redistributed
and more demand for redistribution. The limits of redistributive justice are, in the
present conditions, determined not by the absolute volume of available wealth, but by
the amount its owners are prepared to leave in the country.
The second critical stance is more diffi cult to defi ne, since it is articulated from very
different points of view and often in a very disconnected fashion, e.g. by the churches,
by what remains of the intellectual Left, or by traditional advocates of the welfare state in
the trade unions or the SPD. Their underlying motivation is not the concern that Germany’s
economy is too ineffi cient, but the social cohesion of the commonweal. Social integration
– and particularly the integration into society of the younger generation – cannot
be achieved by the market, it is based on shared convictions and traditions handed on
from one generation to the next. Phenomena like rising adolescent crime, extreme rightwing
violence, disenchantment with politics and political parties, declining membership
of churches and clubs, the abuse of welfare benefi ts, increasingly materialistic and selfi sh
values, falling numbers of children and the precarious state of the nuclear family can be
interpreted as symptoms of a gradual erosion of the common foundations of German
11

society. This development is being accelerated by the farreaching expectations of fl exibility
imposed on the workers due to »globalization«, which cuts down to a minimum the
amount of time and space available for common use. The reduction of collective arrangements
– e. g. of working hours – and of welfare protection is pulverizing those communities
– families, clubs, trade unions, friends, neighborhoods – on which social integration
ultimately rests. The welfare state, it can be argued, not only protects the individuals
from the risks of the market; under capitalist conditions, it is also the precondition for a
sphere of community to be formed and maintained beyond the market, without which
social integration would be at risk. A precondition for the welfare state is the nation state
as a framework of institutionalized solidarity. If, under the pressure of globalization, both
the competences of the nation state are eroded and the welfare state is reduced, the question
of what glue is to hold our society together is both topical and justifi ed.
Jürgen Habermas has described the development sketched out above using the concepts
of »network« and »social environment« as two competing forms of coordination
of social activity. 4 Networks – here we can say: markets – are anonymous systems of
relationships in which the actors take decisions on a decentralized and rational basis
and which stabilize themselves via the effi ciency of their results. Social environments,
on the other hand, coordinate the actions of individuals via solidarity, shared traditions
and common beliefs. The development of Europe since the High Middle Ages can, according
to Habermas, be described as a succession of processes of opening and closure,
in which discrete social environments open themselves up to overarching networks, and
then close again at a higher level as a new social environment with an expanded horizon.
The transition from the local to the dynastic and then the national identity, for example,
can be regarded as one such succession of openings and closures. The Industrial Revolution
in England was a particularly dramatic phase in this development – Habermas refers
to Karl Polanyi’s analysis – as, for the fi rst time in history, it destroyed the traditional
basis of social relations and left it to the market to provide people, i. e. labor, with a living.
This »revolution of the rich against the poor« (Polanyi) meant that the underclasses
were deprived of their social environment and robbed not only of the material basis for
their existence, but also of all other social recognition and solidarity. Since the Industrial
Revolution in England treated the majority of the country’s population like the population
of a colonized country, it created, according to Polanyi, an untenable social situation
and sparked off the reactions – by the state, the aristocracy and the rising workers’ movement
– which tried to rein in the dynamism of the market. 5 The long-term result of this
uncoordinated counter-movement, which derived from very different interests, was the
welfare state. The current »revolution of the rich against the poor« known as globalization
is trying – albeit in a less dramatic form than in the age of the Industrial Revolution – to
prune back protection in the form of the welfare and the nation state, i. e. to force people to
abandon their traditional forms of coordination of social activity by subjecting them to the
conditions of the market. However, there is at present no sign of an opposing movement
which might close the recent opening at a higher level. 6
4 Jürgen Habermas, Die postnationale Konstellation und die Zukunft der Demokratie, in: idem,
Die postnationale Konstellation. Politische Essays, Frankfurt am Main 1999, p. 125 f.
5 Cf. Karl Polanyi, The Great Transformation, 1944.
6 According to Habermas, the recent opening process, called »globalization«, can lead to a new
»closure« on the European level.
12

The welfare state removed some of the pressure of market-imposed fl exibility and
mobility from the employees and thus gave them a chance to form and maintain social
environments. The working-class structure of the traditional industrial society is an example
of this: through shared values, beliefs and traditions, as embodied in »class-based«
institutions like clubs, trade unions, education or political parties, the social environment
reconciled people with their collective fate of industrial labor – the prospect of
spending a whole life doing hard physical work for little pay. It fulfi lled an integrational
social responsibility which the market (via wages) could not achieve on its own. It helped
to impart values, beliefs and traditions to the next generation. In order to exist, it needed
both a minimum of stability, i. e. stable working and living conditions, a certain degree of
job security and a limitation of social mobility both downwards and upwards, as well as a
minimum of equality, permitting the interpretation of the individual situation as part of
a collective fate (generally the same income level, the same working hours, etc.). Beyond
the social structure of industrial workers in the narrower sense, the welfare state can be
regarded as a complement of the collective fate of those in dependent employment. For it
to function, there must be a predictable biography of those paying in and those drawing
benefi ts, stable life-long employment, interrupted only by temporary exceptions, the nuclear
family with its rigid division of labor between the sexes, and the raising of children,
who then also go on to have similarly stable jobs.
Those who focus their criticism on Germany’s lack of competitiveness are implicitly or
explicitly demanding the renunciation of stable social environments in favor of greater reliance
on markets. They assume that the integrational functions of social environments can
be replaced either by growing individual opportunities or by the pressure of the market, by
the threat of exclusion/ repression or by the mass-media simulation of social environments
(represented by TV stars, racing drivers and princesses). The advocates of the welfare state,
on the other hand, defend not only existing privileges, such as the right to government assistance
when removing tattoos, but also stable social environments and thus the chance
to form an identity and to pass it on to the next generation, a chance which is particularly
important for anyone who can expect but little recompense from the market for his/her
work. 7 If there is nothing to underpin social integration and socialization in the form of at
least partially stable social environments, then there will be a growing danger – particularly
in Germany – that more and more people who have little chance on the market will attempt
to confi rm their ethnic identity by violence, by beating foreigners up with baseball bats. By
destroying social structures and solidarity-based interrelationships, the neoliberal-inspired
modernization creates the mob which obtains by force that which it is denied by society. 8
It should be noted that social disintegration is not a spectator sport: 9 the mud which is
thrown up on the pitch will not fail to hit those who see themselves as the benefi ciaries of
modernization and imagine that they are well away from the scrum.
The concern about the possible loss of social cohesion, due to the threat from an
expansion of market relations, is not a typically German phenomenon. The American
7 According to Richard Sennett, the winners of globalization, too, are increasingly unable to
deduct from their biography some kind of identity and pass it to their children. Cf. Richard Sennett,
The Corrosion of Character, New York 1998.
8 In her famous study on totalitarian rule, Hannah Arendt describes the dissolution of social
structures and the creation of an »un-embedded« underclass as a precondition of the success of
totalitarian movement and governments.
9 Dani Rodrik, op. cit., p. 7.
13

communitarians were driven by a similar motivation, but the majority of them arrived at
a result – the rejection of liberal universalism in favor of specifi c, discrete communities
– which threw out the baby of political liberalism along with the bath water of neoliberalism.
Communitarian undertones can also be heard in the Anglo-Saxon version of social
democratic politics, the »Third Way«. What is specifi c to Germany is the fact that the
confl ict between the market and the social environment is overarched, intensifi ed and altered
by the regional tension between eastern and western Germany. The special history
of German reunifi cation means that eastern Germany is virtually a laboratory in which
we can observe the experiment of modernization as called for by the neoliberals.
14
»OSTALGIA« AND TIES TO THE WEST
With hindsight, German reunifi cation is often associated with a missed opportunity:
reunifi cation was an unexpected shock, a national state of emergency, one of the few
opportunities to make a fresh start. Yet we did not even see a new national anthem, let
alone a new constitution. The »system« of the old Federal Republic was, as many people
lament today, simply imposed on the former GDR in its entirety. There was, however,
never any possibility of welding a synthesis out of eastern and western German elements.
The GDR had – particularly in the eyes of its former citizens – mismanaged itself so badly
that there was literally nothing which could have been rescued to survive reunifi cation,
apart from the signal with the little green man at pedestrian crossings. The rejection of
the GDR by its citizens seemed to be total. It ranged from destroyed memorials and renamed
streets to the hawking of medals and other symbols of the state as junk and the
refusal to eat local agricultural produce. Since nothing could be saved from the GDR,
everything from pension insurance to the sex shop had to be imported from the Federal
Republic. The reverse side of the collapse of the GDR was the absolute confi rmation of
the Federal Republic.
Even if the GDR itself left nothing worth keeping, surely the opposition to the state
could present experiences which should have found expression in the political structure
of the reunited Germany? But the opposition was split into a minority (if one goes by the
electoral results of Alliance ’90, a party allied to the Greens, a minority beneath the fi ve per
cent threshold) which still thought there was a chance to rescue the GDR as a state, to liberate
socialism of its perversions, or to opt for »third ways« between socialism and capitalism,
and a majority, which intuitively and realistically understood that there was no room for
third ways of this type. The masses fl eeing via Hungary to West Germany or threatening to
fl ee to the West did not want any new experiments, they wanted a higher standard of living.
The GDR did not collapse because it was a state based on injustice, but because it was
unable to offer its citizens the quantity and quality of consumer goods which was the norm
in the Federal Republic. And the peaceful revolution, an uprising of consumers who were
prevented from consuming by their state, had little to offer towards a synthesis.
The second association linked to reunifi cation is that of disaster avoided. The collapse
of the GDR itself threatened to take a disastrous turn: as the old GDR elite was no
longer in a position to suppress the opposition by force, a power vacuum developed after
autumn 1989 in which the basic functions of the state threatened to collapse (expressed,
for example, in the loss of authority of the police force). There was a danger that a state
of lawlessness would emerge with a high potential for violence, exacerbated by an out-

of-control mass emigration to the West. Government felt a pressure to fi ll the developing
vacuum quickly, and this could only be done by installing the structures which were
available, rather than those which were best thought-out. In the eyes of those involved,
there was no time available in 1989 and 1990 to proceed other than by »taking over«
– with the approval of a majority in both East and West.
Reunifi cation in the form of a take-over probably prevented the sort of disaster that
comes when states fall apart – as could and can be observed in various places on the
edges of the former Soviet Union. Instead, it unleashed a different sort of disaster: for
the vast majority of eastern Germans, reunifi cation was equivalent to the total collapse
of their social environment. In a socialist economy of shortages, social activity was coordinated
via the authority of social environments, and this by defi nition outweighed
any coordination via the market. Elements of social cohesion, spontaneous cooperation
and improvized creativity existed not in the socialist system but in the gaps it left, and
particularly in the (frequently interrupted) manufacturing process. Perhaps the social
environment of many GDR citizens, those who were neither integrated into the party hierarchy
nor close to the (church-based) opposition, can be described as a specifi c form of
working-class social structure which had long been on the way out in the West (Wolfgang
Engler talks of the »workingish society«). Whilst the offi cial rhetoric about the workers
as the ruling class acted as the threadbare fi gleaf of party rule, the coordination of
manufacturing, which socialist planning was unable to achieve, was actually ensured to a
large extent by cooperation between the workers themselves. In this environment, it was
possible for egalitarian forms of communication to emerge on the basis of shared beliefs
and values (which were not the prescribed beliefs and values of the socialist state), forms
of communication which Wolfgang Engler described as follows: »No-one was to be worse
off than anyone else, and better off only to the extent that this did not arouse the justifi ed
envy of the environment (...) Everyone looked enviously at those above himself, and full
of genuine sympathy at those beneath, always aiming to alleviate serious differences, if
possible to equal them out, even if this meant giving up one’s own advantages«. 10
The uprising of the workers as consumers signifi ed the opening up of a more or less
closed social environment, the replacement of specifi c and personal cooperative relations
by impersonal market relations, as part of which the worker himself came to be valued
solely in terms of his market value. It was at once an act of emancipation and the destruction
of the existing basis for individual orientation. This caused varying reactions. The
most impressive was the refusal to demographically reproduce, the fall in the birth rate
of more than 50 %, the scale of which recalled instances of colonization and enslavement.
The citizens of the failed GDR did overnight what the citizens of the Federal Republic
had needed forty years to do: a change in generative behaviour as a consequence of the
dissolution of stable social environments. Many citizens of the former GDR responded to
the loss of their social identity with the aggressive confi rmation of their ethnic identity.
The pogroms against foreigners were unleashed in eastern Germany. Of course, the wave
of murders of the early 1990s cannot be ascribed solely to the citizens of the new eastern
Germany. There were murderous attacks in Solingen and Moelln as well, two small western
German towns. But the latter were terrorist acts. Pogroms with mass participation in
front of the television cameras were restricted to the east of the country. A third, more
harmless reaction came later: the transfi guration (dubbed »Ostalgia«) of the old GDR,
10 Wolfgang Engler, DIE Ostdeutschen. Kunde von einem verlorenen Land, Berlin 1999, S. 211.
15

i. e. not of the state itself, but of the social environments which the former state had had
to leave niches for. It is refl ected in a new cult for old products, a new closing off (e.g.
against incomers from the west) and in votes for the PDS, the former communist party.
Even though the impact of German reunifi cation on the day-to-day life of the western
Germans was restricted to marginal changes in the general economic position, there was
a parallel political movement in the west of the country too, which may only have been
characteristic of an intellectual minority, but which did infl uence the political culture of
the whole of Germany. The response to reunifi cation of western German intellectuals
on the Left in particular was a fairly emphatic confi rmation that the Federal Republic of
Germany was founded on its ties with the West. In the fi eld of foreign policy, the Western
ties were cited as an argument against any possibility of a separate German route; but
of far greater signifi cance were the political values associated with these Western ties,
which many regarded as a counterweight to the extreme nationalist undertones which
could be read into the slogan shouted at eastern German demonstrations: »We are one
people« (which had replaced the insubordinate »We are the people«). Just recall Habermas’s
stressing of constitutional patriotism, which was now wheeled out again as the
identity-forming basis of a civilized community as a counterweight to the newly respectable
ethnic-nationalist basis of identity. With this – it is fair to say, late – discovery of
the Federal Republic’s Western ties, the western German Left in particular (but not only
the Left) endeavored to lend a more overarching dimension of a social environment to
the democracy of the Federal Republic – a democracy which had previously tended to
be viewed or criticized in functional terms. The sympathy of the nation with the values
set out in the constitution was supposed to refl ect a treasure chest of shared beliefs and
traditions which represented more than a basis of republican consensus-formation legitimized
by processes and outcomes, i. e. which actually constituted a social environment
arching over local, origin-based, ethnic and personal ties.
16
EAST AND WEST: THE GATES TO PARADISE
Those people, still GDR citizens, who streamed into the Federal Republic in 1989 in
their stone-washed jeans, a fashion of yesteryear, and their cars from the year before that,
presented the West Germans with part of their own past, the days of the 1950s, when people
were collectively poorer and more equal, consumer opportunities were still discoveries,
abroad was a long way away and certainties had not been torn apart in the cultural storm
of the 1968 generation. But the Federal Republic itself was standing on the threshold of the
1990s, and the Golden Age of the 1950s was no more than a distant memory. The tragedy of
the citizens of the former GDR was that they gained admittance to the consumer paradise
of the Federal Republic when it had long since ceased to be a paradise for many people
– and that they entered it as a collective of already disadvantaged people.
If there is an economic myth surrounding the foundation of the Federal Republic, it
was the forty marks handed to each individual when the monetary reform took place in
1948/49. Of course, this did not affect the distribution of fi xed assets, but it did create the
impression of a largely equal start and was able to form the basis of a comparatively strong
social consensus. However, this economic myth became less convincing to people as the
initial situation of (apparently) equal opportunities was transformed into more manifest
inequality (and thus the group of »heirs« increased in number – the West Germans en-

joyed the historic privilege of being able to accumulate and hand on wealth for forty years
without war or infl ation). The equivalent economic myth of German reunifi cation was the
monetary reform of 1990 and the one-to-one exchange rate of the GDR mark to the Dmark,
i. e. the citizens of the GDR were able to join the Federal Republic with an exchange
of their assets (or at least part of their assets) from an internationally worthless to a highly
valued currency. The one-to-one exchange rate created formal equality between the old and
the new citizens – and sealed the fate of the GDR economy and its jobs. The citizens of the
new Länder were and remain doubly disadvantaged: their accession to the Federal Republic
integrated a people without heirs. And it integrated a people who had lost their source
of earnings. The mass unemployment seen in the West for years (but which went hand in
hand with an increase in employment until 1990) rolled across the east of Germany like an
enormous wave. On top of the internal inequalities in the Federal Republic there came a
regional imbalance in respective positions which would inevitably undermine the binding
nature of the economic myth of monetary union very quickly.
In addition, the effect of national reunifi cation was socially disintegrational for various
reasons. The fact that socialism had managed the economy so badly resulted in an
ideological transfi guration of the market and of capitalist virtues – fl exibility, risk-taking,
initiative, greed. The mortally wounded socialism thus also infected its hostile brother,
the Western welfare state. The ignominious collapse of socialism in Europe was not the
reason why neoliberal business representatives and professors of economics merrily
called for the dismantling of the welfare state, but it did assist their efforts. Quite apart
from the fact that the burdens of reunifi cation were also unfairly shared out in the west
of Germany – they were mainly borne by the workers, whose insurance funds were plundered
– the collapse of socialism seemed to remove an emotional barrier which, at least
in the Federal Republic, had prevented over-enthusiastic public celebrations of capitalist
dynamism and inequality. Following the collapse of socialism, there was a fresh wave of
calls to roll up the welfare safety net. One cannot help suspecting that the reality of the
welfare state in the Federal Republic, or its acceptance by the elites, was partly the result
of the fact that, across the border, there was a second German state which claimed to
represent a more just social system. It was as though there had been a minimum standard
of living for workers in West Germany until 1989 – defi ned by the standard of living in
the GDR, which had to be exceeded. This lower threshold had now gone.
The social situation of post-reunifi cation has prevented solidarity between the disadvantaged
in the west and east of Germany. The eastern Germans defi ne their situation
less in welfare terms and more in terms of social environment: their collective background
is the experience of the GDR, which no-one is entitled to comment on if he did
not live there until the bitter end. These experiences cannot become part of the shared
heritage of the reunited country, because they are based on a conscious self-exclusion.
Disadvantage in eastern Germany is the fate of a collective; in western Germany, it is an
individual problem.
GERMAN SOCIETY AND THE LEFT
It is one of the notorious ironies of history that it was in the 1960s, a period of unprecedented
prosperity and relative (perceived) social justice in the old Federal Republic, that
a Marxist-inspired fundamental opposition emerged whose most extreme practitioners
did not shrink from terrorism. The drama of the political action in the 1960s and early
17

1970s was in striking contrast to a social situation which – at least in an international
and historical comparison – can be viewed as an era of harmony. Today, by contrast,
genuinely left-wing positions have virtually disappeared in the far more divided German
society of the late 1990s. And the reunited Germany is a socially divided nation; the
fault-lines are deeper and sharper than they were in the old Federal Republic, let alone
in the failed GDR. To summarize: (1) There is an east-west confl ict within the country
– between a poorer east, a country without heirlooms and jobs, and a class-divided, but
generally wealthier west. (2) Since at least the early 1980s there has been a process of
concentration of income and property in West Germany and simultaneously (3) the exclusion
of an underclass of the unemployed and the working poor; this corresponds to
(4) the self-exclusion of the elites and (5) the increasing burden on the worker (still) in
regular employment who has to bear the costs of social insurance, unemployment and
poverty, as well as the risks and burdens of economic restructuring.
The outstanding feature in the political sphere at the end of this century is the fact
that, despite the heightened »objective« social confl icts, the political Left seems to have
disappeared. Trade unions and traditional social democracy have gone on the defensive.
The modernizers of social democracy, using slogans like the Third Way or the New Centre,
have basically given up viewing the inequalities that are now appearing again as a
»political challenge«; by confi rming – resignedly or cheerfully – that redistributive justice
is not an issue under the given conditions, they have departed from the core of social
democratic and left-wing identity. What remains is an intellectual Left of individuals
inside and outside the political parties and trade unions which often tends, out of disappointment
over the way the world is going, to renounce any sense of political reality.
The weakness or the lack of a left-wing project refl ects the peculiar lack of alternatives
in the present system. Along with the socialism of the Eastern bloc, the idea that a
different system than the present one is conceivable has collapsed. Criticism of capitalism
seems to have been left to the Vatican and the Taliban. Francis Fukuyama, whose argument
that history had come to an end was ridiculed at the time, has been proved right
in a certain sense, even if the triumphant undertone with which he celebrated the victory
of market economics and democracy was misplaced. It is this paralyzing lack of alternatives
that makes it so diffi cult – even on the occasion of a new millennium – to point
to prospects which are more than the continuation or acceleration of what is already
in place. It is probably correct to presume that the future will bring the dissolution of
protected spheres which currently still shelter us to some extent from the impositions of
the market. In the past, we made a large number of implicit economic decisions, without
always having to act as calculating market actors. The choice of our place of residence,
our life-long partner, our way of life, our circle of friends, the number of children, etc. is,
at least in the majority of cases, not yet determined solely by economic factors – but an
increasingly unrestricted market could force us to become the all-embracing and exclusive
economic actors which we theoretically always were. This would mean that no space
and time would remain in which social identities could be formed to be passed on to the
next generation. What we currently interpret as manifestations of the disappearance of
social cohesion might then prove not to be a deviation from the norm (whatever that
norm might be), but to be the norm itself.
The »terror of economics« is not that we have to make a large number of decisions in
terms of costs and benefi ts, but that economics is threatening to force its logic on society
as a whole. Under these conditions, a political project of the Left which endeavored to
18

etain or even expand spheres offering protection from the market would gain plausibility.
In the past, the Left perceived itself as the avant-garde of modernization. Therefore its
ambiguous perception of capitalism, which was fundamentally rejected, but at the same
time, because of its enormous creativity, seen as the precondition for the emergence of
a socialist society. This historical and philosophical optimism has been disproved by the
20th century – by two world wars, the denial of civilization in the holocaust, and the miserable
failure of socialism in the Eastern bloc. Today, it would be right to take the view
that the ability of people to live together is a fi nite resource – and therefore one which
must be conserved – and to make it into a political program.
19

REPORT AND RECOMMENDATIONS OF THE SPD’S
WORKING GROUP ON THE FUTURE OF THE PARTY AS
A MEMBER ORGANISATION
20
This article authored by German SPD was originally published
by Friedrich-Ebert-Stiftung, London Offi ce, London, 2006
Democratic parties that are widely anchored in society and local communities are the
bedrock of parliamentary democracies. However, in all Western societies these parties suffer
from dwindling membership numbers and a decline in political engagement. What can
parties do to stop this process and to rekindle appreciation of political engagement in the
society, particularly at local level?
The German SPD has in 2004 created a working group on this issue. The fi ndings and
proposals of this group could be of interest also to other Western democracies and their parties
struggling with falling membership and political engagement.
INTRODUCTION
Low new member fi gures for political parties in Germany are evidence that partypolitical
commitment is retrogressive, although there are tangible signs of improvement.
From a poll of new members in 2004 we know that activists in other clubs and associations
are more keenly interested in working within the SPD than people who are not
involved in intercommunity activities. It makes good sense to harness this interest and to
increase our efforts in this direction.
Disaffection with politics and political parties is a much-discussed topic in the public
domain. Journalists love to report on midemeanours by politicians, negative poll data,
waves of party membership resignations and so on and such news is always bound to
attract interest in the media.
The other side of the coin is that the honorary commitment and work by many thousands
of men and women in local politics, in the democratic parties and in clubs and associations,
barely gets a mention. A vigorous and democratic sense of community would
be impossible to imagine without the work of these men and women.
In the past two years we have lost a great many - too many - members. The reasons
for this are well known, and the number of new members has not replaced the old ones.
Nevertheless, we should at least acknowledge the fact that also in the diffi cult years of
2003 and 2004 we welcomed about 20,000 new members.
Despite the increase in the number of new members we must face the fact that politics
as such and consequently the political par ties are facing considerable rejection and a
crisis of trust. Such a judgement may be unfair and over-generalised, especially for those
people who are highly motivated, perform well and invest a great deal of time and effort
in the cause. We must never theless take this situation seriously.
The SPD is and remains a party of its members. We want our roots to be in soci ety,
we want to create trust, address peo ple’s wishes, hopes and concerns and we want to
convert this into political action.

Since the beginning of 2004, this working group’s work has been carried on with the
aim of developing contributions towards an evolving “modern member-based party”. We
don’t want to reinvent the wheel; we want to fi nd ways of making the party more attractive
and more capable of fi ghting campaigns.
A member-based party thrives on an active and committed membership. For that
rea son, it is important for us to be an attractive party. That means offering the sort of
infra structure which encourages involvement and makes the party accessible and open
for engagement.
To achieve this goal, we should undertake organisations reforms which include,
among others, the following central ele ments:
• Introduction of guest membership.
• Opening up the party by a generous in terpretation of the residency principle.
• Improvement of services for members and branches.
• Minimising bureaucracy and pruning the constitution and election regulations.
2. THE “MEMBERS’ PARTY” WORKING GROUP
The assigned tasks of the SPD’s working group on the future of the party as a member
organisation were the followings ones:
• Further development of modern organ isational forms of the SPD as a people’s and
members’ party.
• Suggestions for intensifi cation of target-group work.
• Expansion of qualifi cation measures for honorary offi cers, mandate holders and fulltime
staff.
• Proposals for modernisation of political communication at all levels of party work.
• Implementation of the principle of gender mainstreaming in work and communication
structures of the party.
• The concept should include an overhaul of the party’s constitution.
An active stake holder society sets new tasks for political parties, which should become
mediators between general and indi vidual interests. They are and remain an important
element in the political opinion-forming process.
The nature of modern stake holder society requires a different understanding of
soci ety and consequently of political and civil commitment. The transfer of state responsibility
to civil society equally has conse quences just as does the voluntary accep tance
of tasks by citizens and self-organi sation to tackle them for the common good. The
model of the “activating state”, a re distribution of responsibilities borne by the state
and society, is coming to the fore front. There are many people in our society who are
committed to the good of the community. For others, however, the con cept of solidarity
and common good has taken a back seat and has allowed indi vidualism and a selfi sh
outlook to take hold.
The hallmark of today’s society is increas ing mobility. For many people, the place
where they work is no longer the centre of their daily lives. Parents, and mothers in particular,
increasingly have less time alongside family and work commitments, to devote
time to voluntary engagement. This makes it more diffi cult also for the parties to entice
people to work for them.
21

Traditional social structures are disap pearing and people’s needs are changing. The
willingness to get involved has not generally decreased; but disaffection with party politics
and a distancing from party-political orientation has meant that chang ing attitudes
have not necessarily had a positive effect for the political parties.
Party-political loyalty has become consid erably weaker and highly fl exible. A shift
in attitudes towards party-political commit ment has taken place. The political parties
are faced with even more competition from other time-limited commitments beyond the
party spectrum. Social change harbours certain risks for the political parties -as well as
opportunities.
Citizens now use their free time in a differ ent manner to former times. They can
choose from far more choices than hith erto. Pressure at work has increased for many
people and the willingness to get involved in politics often suffers as a result.
People have more time on their hands at certain times in their lives. These phases can
be used to make a party-political commitment, while for those periods when people are
more in demand from family or work, the party needs to develop ways in which a partial
commitment can be se cured.
These developments and the consequent requirements need to be taken into account
in further developing party structures and the party’s services and its work. We
do know that there is a great willingness for social commitment. We need to address
and harness this potential for party-political commitment. Recruiting efforts are therefore
particularly promising among those people already active in clubs, associations
and political initiatives.
The discussion about whether we want to be a members’ and people’s party or an election
association/network party for professionals and mandate holders is nothing new.
What we have realised is that in the cause of social democracy there is simply no alternative
to the principle of a members’ and people’s party.
Politics at a federal level continues to re cruit people mainly from local politics. The
local base is absolutely essential for the development of political staff. At the same
time, preparation for holding a political mandate needs to be further developed. It is
especially important to encourage women to become active in politics. The availability
of training via the Sozialdemok ratische Kommunalakademie (social de mocratic local
politics academy) and its many regional satellites is especially im portant for encouraging
young talent.
22
3. THE PARTY MEMBER AND ITS EXPECTATIONS
The working group’s major suggestions and recommendations are the followings
ones:
• Offer guest membership, a limited commitment
• Offer project and forum work within the different sections of the SPD
• Offer exclusive information and dis cussion opportunities including those via the
party website spd online.de
• Internal party training: increase the “value” of membership through fur ther training
and expansion of com petences (qualifi cation campaign) for party offi ces and political
man dates, as well as for personal areas of life.
• Create offers related to leisure ac tivities

• React to the greater level of peo ple’s professional and private mo bility
• Make the residency principle more fl exible
• Encourage a culture of recognition for honorary and voluntary involve ment
• Expand members’ involvement and implement a more proactive ap proach to the motions
passed in Wiesbaden in 1993 by means of primary elections, polling of members
and member decisions
• Develop more target-group-oriented new member campaigns
Member expectations
Men and women join the SPD because they have expectations of the party. There is
an interesting difference, according to surveys, between new members and those who
have been party members for a long time.
Some of our members do not wish to be active; they wish to support the party only
through their membership. That is perfectly legitimate and is a positive motive for becoming
a member. The majority of mem bers, however, are very willing to play an active
role in the party.
One very signifi cant fact is that a great many members wish to learn more about and
discuss the history and core values of the party and how to maintain these.
The continuing expectation of new mem bers of becoming “politically better informed”
by joining the SPD is of special signifi cance for the party. This has become
more diffi cult in the era of mass media, because the media is so fast at delivering much
factual information. That is why it is important for the party to offer exclusive information
and discussion channels where members can obtain more background and indepth
information.
The drafting and dissemination of critical analyses, especially for distribution via the
internet, is an especially important instru ment in this regard. The same applies to the exclusive
internet service available at spd-online.de, which is being used by more and more
members as a result of people’s changed information and communication habits.
However, these services must not be a one-way channel. Since members want to participate
in discussions and opinion-forming processes, such services need to be interactive.
We should assess how we can open up members’ access to modern communication
channels so that they can use them to participate in the discussion process and decisionmaking.
Member training can be a decisive instru ment for the future in order to ally people
with the party. At a time when all large or ganisations are losing members it is im portant
to increase the benefi ts of mem bership of a political party.
If membership offers, among other things, the opportunity to gain qualifi cations in
the fi eld of political topics and to learn or im prove on work techniques, public speaking
skills etc, the party will benefi t because it can then expect that suitable training ses sions
will produce skilled members who can fi ll party jobs and political mandates with good
candidates. Conversely, mem bers too can benefi t by using what they have learned in
other spheres, such as at school, in their studies and at work.
The SPD offers specifi c training at all levels including city local, constituency and
dis trict level. Political mentoring programmes, seminars for new members and provision
of basic party work procedures have proved very useful in practice. When it comes to
planning seminars and other ac tivities the different pressures experienced by men and
23

women with regard to work and family need to be taken into account more than has
hitherto been the case.
The political party at local level is known with good reason as the “local party”
be cause the designation suggests social in teraction and the convivial meeting place
we wish to be. We want to be the sort of party which is not always “highly political”;
we also want to be a place where people can get together and do interesting things together.
Events like an evening of cards or skittles, a country hike, visits to the theatre
or a fi lm evening are by no means an old-fashioned concept; they are still up-to-date,
attractive and popular.
People are willing and able to participate at different levels of activity during different
phases of their lives. The party needs to be aware of this and to react accordingly. Expansion
of project-related work in recent years was a sensible move in this context. Other
signifi cant elements are working par ties and member participation in the dis cussion
processes, which can be brought to a conclusion within a fi xed time limit.
To date, the SPD is losing too many mem bers as a result of moving on. Since soci ety
expects its citizens to be very mobile, the SPD also needs to develop concepts for securing
the continuity of the engage ment of qualifi ed, experienced members when they move
from one place to another. The SPD has found it diffi cult in many lo cations to reintegrate
members into the activities in their new location’s local party.
We want to recognise honorary commit ment more than was the case to date. It should
take a pivotal role. We need a cul ture of recognition for honorary work and voluntary participation
in the workings of our society. This also applies to political commitment, which
is an important ele ment. Democracy cannot function without honorary commitment. It
is necessary to highlight this point in a self-assured man ner.
Honouring members’ commitment after 10, 25, 40, 50 and more years in the party is
of pivotal signifi cance. Such anniversaries should be celebrated with a suitable event at
local or regional level on a date close to the anniversary. Full-time SPD staff should support
this by making sure that such anni versaries are not forgotten. It is also nec essary
that services rendered by party members in an honorary capacity should be suitably
acknowledged by the party. This important recognition all too often fails to materialise,
when it could so easily be dealt with by means of a “thank-you”, a congratulatory letter or
a complimentary mention. Certifi cates are available in cases of special services rendered,
and there is also the possibility of awarding the Willy Brandt Medal. Such special events
should be marked at the regional level.
24
Participation
The “SPD 2000” Reform plan of 1993 ex panded the opportunities for member participation.
Since that time, primary elections have been made possible; member referendum
and petition have both been en shrined in the organisational statutes.
In many places, the plenary principle for nomination of candidates at regional and
federal level was established, which meant that each and every member of the party had
a say in SPD personnel decisions. Candidates at local level are nearly always nominated
at a special meeting to which the entire local membership is invited, so that all the members
have the opportunity to contribute to the decision-making proc ess.
Local party executives and the local mem bership assembly are authorised to submit
motions to all SPD party conferences. This means that even “normal” party members

have the opportunity to infl uence the pro gramme and the central political orientation of
the party. The SPD therefore has no lack of means of participation, but there is no doubt
a defi cit among members in the awareness of these opportunities for par ticipation. That
means that we must strive to improve the way we present the oppor tunities for participating
in the SPD and exerting infl uence at a political and person nel level.
We propose making much more proactive use of instruments like member involvement
and member surveys (internal opinion polls).
Target-group-oriented new member campaign
The work of the working parties 1 , and in particular their ability to appeal to the most
diverse of levels and groups within society, should be exploited far more intensively than
before.
This applies in particular to the process of soliciting new members. We know from
surveys carried out among new members that people who are already involved in clubs
and associations are the most willing to join the party. It is therefore logical to launch a
new member campaign which is target-group-orientated. The working par ties with their
skills and contacts will play an important role here.
One of the especially important target groups is young employees. The new member
survey has shown that ever fewer young people in this group (including train ees) are joining
the party. This is a threat to the traditional grassroots base of social democracy among
employees. We there fore need concerted action by as many party groups as possible in
order to regain ground in the work-place related sectors of social life.
One approach to young school-leavers embarking on their working lives could be for
the whole party to stage a “youth day” with campaigns and events to attract new young
members at the beginning of the study or trainee period (before young peo ple start work
or vocational training). The party needs to improve its overall profi le as a representative
and advisory institution in this connection. We should look at working with the trades
unions on this and seek to benefi t from their experience in this fi eld.
Young academics and university politics constitute another target group which is important
for the SPD. We need to develop a network among young academics in or der to
be able to benefi t from future opin ion-leaders in the fi eld.
In order to achieve this, the party must en courage scientifi c discourse and link this
into the party organisation. Study groups and debating clubs at universities - in connection
with the existing Young Socialists (Juso) university groups -should encour age
social democratic debate. In the run-up to the federal elections in 2006 we there fore recommend
launching a correspond ing new member campaign aimed specially at various
target groups.
1 The SPD has various “working parties”. They look after special areas and groups and put
their topics and views on the agenda. Non-members also have the opportunity to be involved in
the working parties in order to become familiar with the work of the SPD aimed at specifi c groups
within the membership: the Jusos (young socialists); AfA (the working party for employee issues);
ASF (the social democratic women’s working party); SPD 60 plus (the working party for senior
citizens within the SPD); ASG (the working party on health); AfB (the working party for education);
ASJ (the working party for social democ ratic lawyers); AGS (the working party for the selfemployed)
and AvS (the working party on erstwhile persecuted social democrats).
25

26
4. THE LOCAL PARTY
The working group’s major suggestions and recommendations are the followings
ones:
• The local party is and remains the basis for social democracy
• Local parties are not just a location where local politics is made; they are also a discussion
and information forum for all other political issues
• The local party should be a location where men and women of different ages and
from diverse social groups can meet a mirror of society itself
• The local party should be a place for so cial encounters and exchange of views
• Local executive members should get more assistance and backing from the party’s
main offi ces (practical help and suggestions with annual budgets etc).
• Local party should be an educational site
• Stronger implementation of personal skills in local parties, involvement and information
The local party as the basis for social democracy
The local parties are and remain the grass-roots base and the “heartbeat” of social
democracy. All members belong to a local party where they can participate in discussions
and events and where there is a di rect, passive and usually also an active right to
vote/stand for the party offi cers within the local party, local electoral posts and to elect
delegates for higher echelons within the party.
Local parties are not just a place where local politics is organised; they are also a discussion
and information forum for all other political issues. Local parties play a central
role within the party.
The numerous tasks of a local party should include:
• Organisation of an attractive programme of social events,
• Involvement in local political consensus,
• Provision of information for members and the population at large,
• Involvement in internal party debate of issues and programmes,
• Networking within the community
• Participation in local community life,
• approaching important target groups,
• Press and PR,
• monitoring of a local party web page,
• Development of measures to attract new members and ensure loyalty of existing
members.
Many of these tasks demand a high level of activity from a local party and can only be
fulfi lled if the work is distributed over as many shoulders as possible.
However: more than 1000 local SPD par ties have fewer than ten members. Where
such structures function thanks to the enormous commitment of individual com rades 2 ,
there is no need for action. Where the necessary work can simply no longer be delivered,
regional and local parties should work together in order to improve the situation. Merg-
2 While the term is looked upon by many mem bers of New Labour as outmoded, “comrade” is
still used among the traditional wing of the Brit ish Labour Party and “Genosse”, its equivalent in
German, is still widely used within the SPD.

ing two or more small units could be a way of solving the prob lem. There is however
no ideal size for a local party. Nevertheless, the working group does recommend more
cooperation than before among local parties when it comes to new members’ meetings,
evening seminars and other events.
The local party principle remains to this day a great opportunity for German social
de mocracy. Even in the era of mass media, the majority of voters, just like potential party
members, arrive at their ultimate de cision as a result of a personal contact.
A strong local party is one of the few places within society where people of dif ferent
ages and from different social groups can come together in order to dis cuss politics, to
constitute political proc esses and to make a mutual commitment to a cause. That is why
it is desirable to develop local parties as a mirror image of the social fabric of a suburb
or community.
Member involvement at local party level is as already described -laid down in the
party constitution. The extent to which that involvement is exploited depends however
on how often the local party meets. In our sample constitution we suggest monthly members’
meetings. It would seem sensi ble in any case to lay down in the organ isational
statues that a members’ meeting should take place at least twice a year. Such meetings
should then be comple mented by other events (social events, get togethers, discussions
with local council lors etc.).
Local party planning
Successful work at local party level re quires harnessing the skills of as many members
as possible, acknowledging the differences in time and effort that individu als can
invest. It is helpful to draw up an annual plan of action. The local party can always revert
to this plan, while at the same time reacting as required to current political events or
questions which arise in the course of a year.
Every year, the SPD party executive drafts a “sample” plan of action meant to serve
as a basis for annual local planning. For in stance, anniversaries or commemorations recalling
important happenings in the course of German social democracy can serve as
the trigger for planned events. At the same time, social functions which also encourage
contact with other associations and initiatives in the local community should not be neglected.
A New Year’s Ball or a May Day celebration are ideal exam ples. Long-term SPD
members can be honoured at special events such as Christmas parties or receptions.
Important current political topics should of course also play a role meetings and
events.
We do recommend planning a calendar of events based on concrete goals.
This could include for example:
• increasing the number of SPD members by a certain fi gure,
• carrying through a fi xed number of events,
• intensifying contact with certain groups or
• achieving a certain number of press and PR publications in the course of one year.
A great deal can be achieved in an SPD local party if all the available opportunities
and energy reserves are brought into play. The question “Do I know my members well?”
is therefore of special importance for the chairman of any local party. This ap plies in
particular to professional abilities, political interests, political experience, so cial contacts
and involvement in clubs and associations.
27

A telephone campaign can serve to can vass local party members about their knowledge.
At the same time, this can be an opportunity to ask people whether they are willing
to help in certain areas or to inform them about individual projects.
Once the skills and interests of many SPD members are known, the local party’s programme
can be drawn up accordingly. Such topics which interest a lot of people and form
the basis of a successful event should be addressed because there is a certainty that many
members will partici pate.
28
Member participation in the local party
As already described, our members have joined the party with different expectations
and this is something which the local party must take into account. Every local party has
specialists for certain tasks and ex perts who are versed in specifi c topics. It is of special
importance however to delegate tasks -in some cases beyond the local party -and to provide
those members in terested with the information they require.
The signifi cance of the internet as a means of communication and a channel for information
will continue to grow since it offers the opportunity to quickly and cheaply reach
many members and the media via e-mail. This makes regular press and PR work even easier
to conduct. We recom mend creating theme-based e-mail distri bution lists for members and
those inter ested, to whom invitations to events and information sheets can be forwarded.
The Willy Brandt House 3 produces a weekly fl yer on a specifi c political topic. In addition,
more detailed information on all the important political issues is updated regularly
on the SPD member network spd-online.de. It is recommended that members be regularly
reminded that they are always welcome at the local party’s events and meetings. We
think it very sen sible that members should have the op portunity as often as possible to
be in volved in decision-making.
Project work as a means of participation
Many members do not wish to get involved in a local party’s political organisation
work on a long-term basis and are therefore un willing to stand as candidates for the
ex ecutive. At the same time, they are usually interested in making a contribution to the
party according to their ability to do so. Such members can be encouraged to get involved
by placing a time or scope limit on projects.
Examples of projects are:
• drawing up a programme (e.g. a local election campaign plan),
• organising an event (e.g. discussion, a summer party),
• (regular) compiling of a ward newspaper,
• looking after the web page.
5. TARGET GROUP WORK
The working group’s major suggestions and recommendations in this area are the
followings ones:
3 Willy Brandt Haus is the name of the SPD National Secretariat in Berlin, similar to “Victoria
Street” in the UK.

• Maintain the diversity of the target group work
• More time-limited offers and project work
• Target-group work is traditionally a central element of the SPD’s politi cal work. This
not only facilitates a dialogue and contact with various social groups; it is a way of
re searching people’s knowledge and skills for all sorts of political topics. The input
from this fi eld is indispen sable for the party’s work.
• Target-group work also serves to help us fi nd new SPD members. Without targetgroup
work, the party would simply not occupy a focal point in society.
• The working parties as an integral part of the party as a whole support this work.
Within the framework of the working parties there is the op portunity of making a
more active approach towards people. Project work, participation by outside ex perts,
the creation of networks and close cooperation with associated organisations have
long been an in tegral part of the working parties’ procedures. We must use that contribution
constructively in our work.
Openness
“Life” in the working parties is part of the lifeblood of the SPD. It is a diversifi ed
life, marked by a number of different ways of working, and results in a wide range of
activities.
In addition to classical work forms, there exist other forums at almost all regional and
local parties, where work proceeds: these are often in the classical fi elds of the arts, science
and the “one-world” spectrum as well as in the sporting fi eld.
Social democratic forums are a window for interested groups on the member party.
They create an important network for en counters, exchange of views and local ini tiatives.
They bring together various inter est groups from intellectual or cultural backgrounds
with suitable representatives and members of the party as well as friends of social democracy.
These forums are open to non-members and the proce dure is tailored to changing
participation needs according to the individual themes and projects addressed, with
an eye to achieving success.
As a result, innovative questions are sub mitted to the party from outside. Con versely,
social democratic ideas and con cepts can be better communicated to an informed audience
and people associated with the subject in such forum events. Fo rums have long
since been accepted as an integral element of modern media commu nication with signifi -
cance for social democ racy’s profi le and public image.
Especially in diffi cult times, the forums also act as stabilising instruments for both
members and sympathisers who may not agree with every political decision of the
party (or its government), but who identify in principle with the basic tenets of social
democracy.
In the fi ve new (eastern) German states especially there are many specialist committees
working together informally with their regional parliamentarian groups, supplying
all manner of ideas and impetus and therefore often functioning as a sort of advisory
committee. We need to harness the potential in these committees and the productive
groundwork delivered by experts from among our ranks. The party benefi ts from
expert knowledge and that applies also to the working parties. It is therefore desirable
to make greater use of limited-time involvement and project work, be cause this sort of
cooperation can lead to an increased feeling of loyalty and member stability.
29

The party needs, more than ever before, to integrate the working parties into its overall
strategy and the development of its plans.
30
Allocation
Crucial to the viability of the working parties is the clear allocation of members at
all levels. Clarity must be a declared goal. Members belong automatically to the Jusos
(young socialists), the ASF (association of women socialists) and the AG 60plus (sen ior
SPD citizens) provided one fi ts the age or gender profi le.
Allocation within other working groups is more complicated. People participate in
them generally by announcing an interest in getting involved or if they can be identi fi ed
by their membership profi le (profes sional connection for instance). New mem bers need
to be informed in a constructive way of the existence of these working groups and their
contacts, so that they in turn can offer to get involved if they wish. We should look into
whether it is feasible to develop an (online) form via which mem bers can indicate their
interest in joining a working party.
In line with the various structures within local parties, there are also different procedures
when it comes to electing executive committees and involving members in executive
processes at various levels. There is no uniform structure for working parties
within the SPD, and it is consequently un reasonable to expect there to be uniform
expectations and goals. Even the ASF and 60plus -especially in eastern Germany are
often constituted according to the ple nary principle. This applies most especially to
small, thematic working parties who in vite their specifi c “interested parties” to the corresponding
meetings.
Experience shows that working parties are of primary signifi cance as important executors
of party work.
Target-group work is am important part of member-based party work and should
therefore be paid increased attention.
6. CHANGES TO THE CONSTITUTION
The “member-based party” working group was given the task of taking also the modernisation,
streamlining, harmonising and debureaucratising of the party constitution
into account. In order to address this im portant and complex topic, a “constitutional
reform” sub-committee was formed whose expert recommendations would be discussed
and evaluated in detail by the work ing group at a number of meetings.
The members of the working group are of the opinion that the party’s constitution
requires fundamental modernisation, espe cially since the last fundamental constitutional
reform took place back in 1977. The aim is to take account of changed social
realities as well as today’s organisational realities within the structure of German social
democracy.
It is high time to establish more clarity in the application of the constitution in
party life. Frequently encountered problems of interpretation requiring intervention by
an arbitration commission have hitherto re quired knowledge of legal terminology, but
could be avoided by clarifi cations at the draft stage. The statutes need to be streamlined
and made more readable. Su perfl uous repetition and empty phrases must be deleted.

7. INNER-PARTY TRAINING
Social democracy is partly rooted in the worker training associations. From member
surveys we know that 90% of new mem bers are interested in the party’s training courses.
Increasingly, these courses rep resent a “utility value” for members, a com modity which
the SPD can deliver ex clusively. Members expect to be able to use what they learn also in
their profes sional and private lives.
As a result, inner-party training is con stantly gaining in signifi cance. It is also becoming
important justifi cation for ap proaching potential new members and as an element in
securing member loyalty. The working group recommends continua tion of those measures
already imple mented in the fi eld of inner-party education.
As a members’ party, the SPD must de velop a sustained, continued plan to create
a personnel and programmatic base. At all levels the party has the obligation to make
a concerted effort to nurture new talent and to train its top-ranking staff as well as its
broader membership.
The aim of our training plan must be to increasingly prepare members to take on
functions within the party and political mandates. There must be more scope for passing
on experience, mentoring and training for tasks or even just the opportu nity to get help
when it is needed. We must constantly encourage our leaders and their successors within
the party; offer them the skills to develop further and to learn more.
Inner-party training is not about how to present a resolution and cannot be a sim ple
process of passing on knowledge. In ner-party training is meant to produce a concept for
learning which is focussed on active, independent development of knowl edge and skills
based on one’s own ex perience. Such training should be a way of transforming knowledge
and skills into po litical action.
The “Political Education Network” remains an indispensable element within the social
democratic framework. This is the social democratic trainers’ forum for coordination
and debate.
We want to be able to provide the desired training and education courses to meet
the enormous interest expressed by members, especially new members. It is therefore
desirable if district parties offer new mem ber seminars at regular intervals. The courses
(evening seminars) should cover the history of social democracy, the pre sent-day validity
of our core values, infor mation about the organisational principle and the structure
of the party as well as getting to know the internal democratic workings of the party. In
addition, the work ing group deems it important that party offi cers should also be offered
training in party work. Such courses should not be offered on a centralised basis. The aim
must be to improve the attractiveness of the party and its campaigning skills.
The working party recommends that the party executive should draw up an outline
plan of training courses for all levels of the party.
8. AN ENERGETIC PARTY -IDEAS AND EXAMPLES
SPD is awarding a prize for exemplary lo cal branch and constituency party activi ties,
the “Wilhelm Dröscher Prize”. The following examples are drawn among the best applications
to the prize under the header ““Embedded in society”:
31

32
Rodenbach local branch
1st prize, project title: De Roderich -the village bus
Project description: a free village bus ser vice, initiated by the SPD, will carry village
residents between 9.00 am and 6.00 pm within the village. The idea came into being when
shopping facilities for the village dis appeared to the periphery. The bus is also used for travelling
to celebrations, elections and events like theatre visits in Kaiser slautern. The 15 drivers
offer their services on an honorary basis, and the costs of the bus and fuel are covered
by sponsors. A new bus was bought this year using the prize money and sponsorship.
Noteworthy/election result: 64.6% at the local elections in 2004
Wattenbach local branch
Project description: Thanks to continual grassroots work, the local party (65 members)
has established a presence in clubs and initiated sports competitions resulting in
very good election results since the 1990s. Wattenbach local party has set it self a goal of
improving the election result from over 60% to over 70%.
Noteworthy/election result: 75% at the re gional elections in 2002
Kassel-West local branch
Project description: The fi rst local commu nity conference took place in June 2000,
aimed at bringing people together for an exchange of experiences. Non-party work ing
parties worked on tangible problem solving aimed at implementing a profes sional municipal
management system. In the meanwhile a district newspaper has been published.
An Arts and Culture work ing party has taken up its work.
Noteworthy/Election result: 12% increase in this local community at the local elections
compared with the average in Kassel.
Hamburg Billstedt Division 1Central
Project description: In Billstedt, a former stronghold of social democracy, people hardly
took any notice of the SPD after we lost the local elections in 2001. It was de cided to establish
a new attractive SPD in Billstedt. The project was based on net working, cooperation
with clubs and asso ciations. The number of members rose from 94 to 130. A membership
drive or ganised by the Jusos signed up new mem bers throughout Hamburg.
Noteworthy/Election result: Number of new members increased to 136 comrades,
those who have been in the party for 20+ years are leaving the party; new members are
equal to those leaving and losses through death. 35.7% at the local elections in 2004 compared
with 30.5% throughout Hamburg. The group’s new project in 2005: Job Café I Billstedt.
The division has 68,000 inhabitants with a 22.5% share of foreign inhabitants; 9.7%
are unemployed and 14.2% are on benefi ts. It is planned to bring such people together to
exchange experiences and to benefi t from contact with local activists.
Auenkirchen local branch
Project description: A really nice little pro ject which has delighted people in need of
relaxation. Benches (Bank in German) do nated by the local party over the course of 25

years were overhauled and refurbished (in the wake of vandalism and general age ing) for
the local people. A video was fi lmed in cooperation with the local gram mar school showing
bench scenes.
Noteworthy/Election result: Members re newed their membership -Recruitment of
new members equal to lost members.
Bonn city association
New member offensive (MOff) working group.
Project description: It’s good to recruit new party members, but on the other hand
how can new members be encouraged to stay in the party? That was the initial question
posed in April 2002 in the MOff group in Bonn, where the established new member
seminar was put to good use. Participants at the annual seminar were encouraged to get
involved in the working group and to share their experiences -a stroke of luck both for
the working group and for the newly active members. Working together with the local
chairman and a few local “elder statesmen”, members helped to de velop various plans
aimed at contacting new members and establishing contacts.
Neuwied-Altenkirchen constituency (200)
Project title: Choice of a (female) federal parliament candidate in a member-friendly,
procedure selection process open to the electorate
Project description: After the MP Ludwig Eich had made it clear that he would not
stand again as a candidate, the SPD dis trict parties in Neuwied and Altenkirchen decided
unanimously to initiate a member-friendly selection process open to a wider public
to choose a new federal parliament candidate. The idea was to involve as many members
and other citizens in the process without infringing formal law or restricting the legitimate
rights of the mem bers, offi cers and delegates of the con stituency party.
Both district parties agreed on the following nomination procedure: the hustings were
conducted according to a uniform, less formal process agreed beforehand. In ad dition to
the candidates’ manifestos, all those attending received a questionnaire which included the
following questions: How did you like the course of the event? Was there one candidate today
who you particularly liked? The majority of those who attended the hustings did in fact
fi ll out the questionnaire and place it in the box designated for that purpose after the event.
Together with the candidates, members of a working group specially co-opted for the purpose
and designated as advisors and partners to all the candidates, evaluated the questionnaires.
The results were pri marily meant to help them gauge their own appraisal and were
not published. The number of people who attended the four hustings was extremely high.
All of the events were attended by over 100 people, which is highly unusual for a mainly
rural community. Members who otherwise never attended meetings turned up along with
non-members, and they too were able to complete the questionnaire. A surprising number
of young members also took part. The press feedback was on the whole posi tive. Finally,
26-year-old Sabine Bätzing was chosen at the constituency hustings. It was interesting to
note that she was usu ally the front runner in the questionnaire answers. Noteworthy/Election
result: Sabine Bätzing won outright the usually CDU-dominated constituency seat despite
the negative mood at federal level at the time. One fac tor which she benefi ted from
was her high profi le as a result of the hustings.
33

The constituency associations decided not to insist on a preliminary decision to
choose a candidate at their individual party levels. The fi nal decision was to be made
at their joint constituency meeting on Octo ber 23, 2001. In preparation for this deci sion
however it was decided to implement a sort of model procedure which included public
participation from the outset in which candidates themselves could offer their views to
the decision-makers (delegates). The idea was to give as many suitable candidates as
possible the opportunity to put themselves forward. Consequently, local parties were
encouraged to nominate candidates. The idea was to show the gen eral public how much
potential the SPD has.
It was envisaged that as a side effect can didates would raise their own profi les through
their manifestos. Ultimately, there were 8 candidates (six women, two men). Four largescale
hustings were staged, all equally distributed over the two constituen cies’ areas. All
members and inhabitants of the area were invited to attend.
34
9. THE PARTY HEADQUARTER AT THE HEART OF THE PARTY
SPD headquarters offers a whole range of services in support of honorary members’
work.
These include:
• A member’s fi le for each new member
• Welcome letter from the Secretary Gen eral to all newly elected chairs of local
branches
• Training courses for all new local branch chairs
• New internet page at www.mitmachen.spd.de
• Canvassing of potential new members and conference (September 2005)
• Training for organisational advisers to support local branches
• Invitation for nominations and a new con cept for the Wilhelm Dröscher Prize
• Weekly fl yer and Willy-Brandt-Haus mate rial for all local branch chairs and subscribers
• www.spd-online.de, the member network, providing all the important information.
Translation: Janet & Michael Berridge

THE GERMAN ELECTIONS
Consequences for the SPD
Thorben Albrecht 1
This article authored by Thorben Albrecht was originally published
by Friedrich-Ebert-Stiftung, London Offi ce, London, 2009
In the middle of the global fi nancial crisis, which has turned out to also be a crisis for
neo-liberal ideology, Germany went to the polls. The result was a resounding success for the
liberal FDP which came out of the elections stronger than ever before in its 61 year history. It
is now in the position to be the junior partner in a coalition government with the conservative
Christian Democrats (CDU) and their Bavarian sister party, the CSU. The electorate’s
support for the Social Democrats collapsed by 11 percentage points. It was their worst postwar
result to date, even lower than the dismal result of 1953 when the SPD got only 28.8 %
of the votes. After 11 years in government, the SPD is once again relegated to the opposition
benches having to ask itself how this disaster could have happened.
This article will analyse the German elections from the perspective of the Social Democrats:
What do the results signify? What were the reasons for the bad performance of the
SPD? What were the immediate reactions of the party leadership? What are the conclusions
and consequences for the SPD after this election disaster?
THE ELECTION RESULTS
The elections showed a clear mandate for the centre-right parties, in spite of the fact
that Angela Merkel’s CDU/CSU also lost votes and with 33.8% (2005: 35.2) only gained
a third of all votes. The undisputed winner is the liberal FDP which increased its share
of second votes, it wins these additional so called ‘overhang seats’) which favours larger
parties, has given a coalition between CDU/CSU and FDP a clear majority of 332 out of
the 622 seats in the next German Bundestag.
On the left of the political spectrum it was also the smaller parties that gained votes.
The Left Party won 11.9% (2005: 8.7%), the Greens 10.7% (8.1%). The SPD, on the other
hand, tumbled from 34.2% at the last election to 23%. In 2005, the party had an almost
equal share of the votes with the CDU/CSU. With less than 10 million voters the SPD fell
back by over 10 per centage points, which means a loss of over 6 million votes. In part
this was due to a very low turnout. With 70.8% it was even lower than 2005 when 77.7%
of the electorate went to the polls.
That a low turnout is traditionally bad for the So cial Democrats was again underlined
by voters’ migration. By far the largest loss of voters was the 2 million who in 2005 voted
for the SPD but decided to stay at home this time. Added to this are roughly 500.000 SPD
voters lost due to de mographic changes (i.e. the number of voters who had died could not
1 The views expressed in this article are those of the author and do not necessarily refl ect those
of the party.
35

e made up by the number of fi rst-time voters). In contrast to the other parties, the SPD
lost on balance more voters to the Left Party (more than 1.1 million). Approx. 870.000
moved to the CDU/CSU, 860.000 to the Greens and only 520.000 to the FDP.
The poor performance of the SPD was in par ticular evident amongst the lower middle
and the working classes (in both cases -13%) and white-collar employees (-15%). The loss
amongst members of trade unions (13%) and trade union members in working class jobs
(16%) was also high. This proves that the SPD has lost the trust of its traditional electorate
of skilled workers and white-collar trade unionists.
36
REASONS FOR THE ELECTION LOSSES OF THE SPD
There is clearly a loss of trust between the ma jority of Germans who embrace social
democ ratic ideals and the SPD. Opinion polls show that 77 to 85% of voters support the
introduction of a minimum wage, yet only 23% voted SPD which made this one of the
subjects of its elec tion campaign. 59% are for a nuclear energy phase-out, which was initiated
by the SPD and questioned by CDU/CSU and FDP. A majority is against tuition fees,
a majority is for stricter rules for the fi nancial markets, 66% of Germans be lieve that social
fairness is especially important all these are subjects, which the SPD has rep resented
or at least thought to have repre sented. The bottom line therefore shows: Germans believe
in social democracy but do not vote for the Social Democrats.
The SPD’s loss of voter support did not just ma nifest itself during the last legislative
period. It can therefore not be blamed on the diffi cult role the SPD had to play as a junior
partner in the grand coalition, although being part of the coali tion government produced
a rather problematic mixture of a simultaneous government’s and opposition’s election
campaign. The SPD had been losing voters from day one of the ‘Red-Green’ government
under Gerhard Schröder in 1998. That year over 20 million had voted SPD; by 2002, however,
that fi gure had dwindled to 18.5 million, to about 16 million in 2005 and roughly 10
million in 2009. That the number of Social Democratic voters has been halved must be
attributed to an increasing loss of trust in SPD policies in Germany.
After the election results of 2009 this breakdown of trust can no longer be dismissed as
simply a problem of communication. The problem of communication is inherent in many
aspects of SPD policies themselves. This applies espe cially to the social reform programme
‘Agenda 2010’. Apart from the question whether some of these reforms were necessary and
fair, the ne cessity to initiate reforms existed without any doubt. The communication, however,
lacked vi sion and direction. ‘Either we modernise or we will be modernised’ was the
bottom line of a technocratic policy issued from the top. Not only did it fi nd no resonance
among traditional SPD voters, it actually scared many of them off.
Voters do not simply make a rational decision regarding what policies are on offer
in the mar ket place. These offers have to be part and par cel of the voters’ emotional and
cultural refer ences and their moral values. This is especially true when we talk about the
working class, which is traditionally associated with the Social Democrats. But David
Hume’s assertion that ‘reason is the slave of emotion’, not the other way around, also
applies to a new and ‘more modern’ group of voters.
The former German chancellor Gerhard Schröder understood intuitively that the ‘political
brain is an emotional brain’ when he, at least rhetorically, strongly appealed to
Social Democ ratic values during the election campaign of 2005 and was therefore appre-

ciated by modern-day workers. He achieved this by castigating the social injustice of the
CDU’s fi scal policies whilst referring again and again to his own humble background.
Such a volte-face did not work in 2009, because the CDU under chancellor Merkel
had itself un dergone a rhetorical social democratisation process especially since the beginning
of the global fi nancial crisis. Merkel was following the example of the ‘compassionate
conservatism’ of David Cameron in the UK and Fredrik Reinfeldt in Sweden.
During the grand coalition, which forced the SPD into painful compromises with the
CDU/CSU, both parties showed themselves to be rhetorically ‘social democratic’ in spite
of their ideological differences. Yet neither party offered a consistent, value based social
democ ratic policy, which was emotionally trustworthy. This credibility gap contributed
signifi cantly to the poor election results. The SPD will have to close this gap if it wants to
survive in the long term as a ‘catch-all’ party or as they say in German as Volkspartei.
REALIGNMENT OF THE SPD LEADERSHIP
Immediately after the publication of the election results, the SPD’s candidate for the
post of German chancellor, Frank-Walter Steinmeier, declared that he wanted to remain
responsible for the party and would stand for the position as chairman of the parliamentary
SPD group. In other words, in spite of the disastrous election results, the foreign
minister and vice chancellor of the grand coalition did not throw in the towel. But at
the same time he neither demanded overall power within the party, nor did he ques tion
Franz Müntefering’s leadership of the party.
The next day, criticism of the way the SPD’s election campaign had been run was
growing within the executive committee of the party. Members demanded changes in
regards to the party’s policies. Some also wanted a new lead ership. There were those who
felt that Franz Müntefering as party leader and Frank-Walter Steinmeier as the party’s
top candidate were in parts responsible for the decline of the SPD. They had both held
leading positions in the grand coalition and in the ‘Red-Green’ govern ment from 1998 to
2005. In view of the election results and the loss of trust there could be no ‘carry on as
before’ for the SPD. After various meetings of the SPD leadership, party leader Müntefering
hinted at his willingness to step down at the SPD’s party conference in Novem ber.
But there are differing views within the various wings of the SPD regarding what
brought about the election results and to what degree pro gramme and policies would
have to be reviewed and altered. Some saw the SPD’s raising of the retirement age from
65 to 67 and the social re forms contained in the Agenda 2010 as the main reasons for the
loss of credibility. Others saw the rigorous renunciation of SPD policies during the past
11 years as equally untrust worthy.
Comprehensive changes were initiated in order to close ranks within the party and
make it abso lutely clear from the start that all fractions of the party are represented within
the new leadership. Frank Steinmeier, 53, was elected chairman of the parliamentary
SPD group. This was in rec ognition of his vigorous election campaign and as acceptance
of the fact that the right wing of the party would have to be represented through a prominent
member of the new leadership.
The former environment minister Sigmar Gabriel will be nominated as party leader
at the party conference in November. He represents the right wing of the party but has
shown in the past that he can act independently. He has a good grasp of the mood within
37

the SPD and the elec torate. Aged 50, he is part of the new generation of Social Democrats
who will be responsible for the policies of the coming years. He is also ac cepted as the
greatest rhetorical talent within the party.
With Andrea Nahles, the party has for the fi rst time nominated a woman for the post
of general secretary. This post is primarily concerned with the running of the party machinery,
but can also wield political infl uence depending on who holds this post. Nahles
is 39 years old, clearly much younger than Steinmeier or Gabriel. In the 1990s she was
leader of the Jusos (Young So cialists). Later she was for many years a sort of fi gure head
of the left wing of the party. Since 2007 she has been deputy chairperson, without having
totally abandoned her left wing beliefs.
The leadership trio of Gabriel, Nahles and Steinmeier is complemented by four deputy
chairpersons, representing more or less the centre of the party. They are the former
em ployment minister Olaf Scholz, 51. He has not only got his eyes on the position of
deputy chairman, he is also a candidate as Stein meier’s deputy within the parliamentary
party, as well as for the leadership of the SPD in Ham burg. It is expected that he will play
a vital role in the party.
Hannelore Kraft, 48 is chairperson in Nordrhein-Westfalen (North Rhine-Westphalia),
the largest party of the SPD on state level, which will be have state elections next year.
Manuela Schwesig, Minister for Social Affairs in Meck lenburg-Vorpommern (Mecklenburg-Western
Pomerania), was noted for her talents during the election campaign. She is
35 years old and to gether with Nahles represents a generation of younger women. She is
the only representative from East Germany within the new SPD party leadership. Klaus
Wowereit, 56, is governing mayor of Berlin. He represents the left wing of the federal
party and recommends a coalition with the Left Party, although he pushed through drastic
cuts in public spending in Berlin against strong opposition from the trade unions.
38
CHALLENGES TO BE MET BY THE SPD
Personnel questions were quickly solved by nominating the candidates for a new party
leadership. Now the far more complicated questions of party policies and the future organisation
of the party have to be tackled in order to consoli date and strengthen the SPD.
It is very important at this stage that the SPD does not make the mistake of wasting its
energy by concentrating on power options and the rela tions with other parties. The party
did lose some votes by declaring categorically before the elec tions that it will not co-operate
with the Left Par ty of former SPD-chairman Oskar Lafontaine. Yet at the same time it is
questionable whether opting for the opposite would have produced a better result.
In one respect the situation of the SPD is fun damentally different from that of the
CDU/CSU. 70% of all CDU/CSU voters showed a clear pre ference for a coalition with the
FDP, whilst as many as 87% of FDP voters favoured this coali tion. We can therefore assume
that it was this fact that contributed to the relative strength of the FDP compared to the
CDU/CSU. In fact some CDU sympathisers will have voted FDP to make sure that their
dream coalition would come true. Contrary to this, SPD voters were split on their ‘ideal’
coalition. 33% wanted the grand coalition to continue, 32% wanted a coali tion with the
Greens and the FDP and 26% a coalition with the Greens and the Left Party. This shows
that the SPD will not be more suc cessful by opting for a specifi c coalition. Instead it should
(re)develop its own powerful policies and communicate to the electorate what the SPD
stands for. In other words it has to close the credibility gap with potential voters.

It is also important that the SPD must not limit its analysis of the past election to
the question to which party it lost voters and which adjust ments have to be made to win
those voters back. This would be an almost impossible task anyhow, since the SPD lost
voters all around. It would also mean that the SPD would defi ne its political position via
a market gap. In other words the party would be wedged in between the CDU/CSU on
the one side and the Left Par ty on the other.
The question should be what do the voters who left the party and those who remained
have in common? When Germans are asked whether they prefer to live in a
society in which perform ance and effi ciency have got priority or whether they’d rather
opt for a society where solidarity comes fi rst, 59 per cent tend to opt for solidarity and
31 percent for performance. Voters of CDU/CSU and FDP were split down the middle,
whilst 70% SPD sympathisers opted for solidar ity. As many as 70% of undecided voters
asked one week before polling day opted for solidarity. The question that unites
potential Social De mocratic voters is the belief that the SPD stands for a fair and united
society.
The SPD therefore has to get across to the electorate that it represents a society that
stands for social justice, the equality of its peo ple and equal opportunity for all. Performance
and a share in prosperity have to be evenly dis tributed within a society, in which
policies are implemented that reduce social inequalities. Most importantly, the SPD as a
whole will have to convey the policy of fairness convincingly and with passion.
The political competence of the SPD will have to be based on the concept of a ‘fairer
society’ as paramount to Social Democratic identity: eco nomic competence, which is not
simply an atti tude, but a refl ection of an overall economic point of view. It has to convey
that it represents convincing educational and social policies which show that the party
is aware of the problems of the electorate and will offer equal opportunities to all. It has
to demonstrate its skills as a party of the working people, founded on the principles of
fairness.
These skills form the base of a successful par liamentary opposition. It will not be the
rhetorical quality of its MPs, which will bring back voters to the SPD, but better policies
and more convinc ing ideas.
The party conference from 13th to 15th Novem ber in Dresden must be the starting
signal for such opposition policies. In spite of the urgent need for internal discussions,
the SPD must be careful not to concentrate too much on itself. It must quickly adopt the
role of an effi cient oppo sition in the Bundestag. The party must put pressure on the government,
not only in parlia ment but also outside. A close relationship be tween the party
as a whole and the parliamen tary group is absolutely essential. It is equally important
that this co-operation works on an equal basis and does not allow for the personal vanities
of prominent party members.
The party conference will also have to be the starting signal for the return to a ‘catchall’
party, the traditional Volkspartei. It will have to permit open discussions. The SPD can
look back with pride on its 11 years in government, but it has to be prepared to be critical
about its own role where necessary. The party must also be willing to open itself up to
a stronger public debate than before and to interact with other social groups like trade
unions, non-governmental organisa tions and environmental groups. The party will need
the conviction and the power to lead these debates.
Most of all, the SPD will need a strategy that will help it to become again a German
opinion lead er in the medium term. The democratic left will need a central debate
39

in the same way in which the predominant cycle of economic liberalism cannot be
understood without the central dis course ‘private enterprise versus state owner ship’.
To develop and to implement this will be the dominant challenge for the SPD in the
com ing years.
40
Translation: Peter Sahla, Oxford
The views expressed in this article do not necessarily refl ect those of the FES London.
ViSdP (Person responsible according to the German Press Law): Karl-Heinz Spiegel, Director, FES offi ce
London.

THE SPD AND THE DEBACLE OF THE 2009 GERMAN
FEDERAL ELECTIONS:
AN OPPORTUNITY FOR RENEWAL
William E Paterson and James Sloam 1
This article authored by William E Paterson and James Sloam was originally published
by Friedrich-Ebert-Stiftung, London Offi ce, London, 2009
The result of the 2009 German federal elections was disastrous for the German Social
Democratic Party (SPD). Germany’s oldest party slumped to its worst re-sult in the history
of the Federal Republic, polling only 23% of the vote (down from 34% in 2005) (SBD 2009a
and 2009b). The authors, William E Paterson and James Sloam, however, argue that this
devastating defeat must be placed into the wider context of long-term developments in German
and European politics: the decline of the German catch-all parties (and rise of the three
smaller parties); and, the changing role of political parties in general and social democratic
par-ties in modern politics. The election result is not the end or even the beginning of the end
of social democracy. What the SPD now needs are a new generation of charismatic leaders,
a post crisis narrative and new more porous and responsive structures.
The result of the 2009 German federal elections was disastrous for the German Social
Democratic Party (SPD). Germany’s oldest party slumped to its worst result in the history
of the Federal Republic, polling only 23% of the vote (down from 34% in 2005) (SBD
2009a and 2009b). Furthermore, the historically low turnout disguised the depths of the
SPD’s result in 2009, as the party lost over six million voters who either stayed at home
or switched party (almost 40% of the 16 million Germans who had voted for the party
only four years earlier). For German party politics – unused to political land-slides – this
marked an extraordinary turn of events. Trust in the SPD’s competence, identifi cation
with its values, and belief in its credibility all nosedived. The loss among younger voters
was particularly damaging. Whilst SPD-inspired reforms to the welfare state (particularly
to unemployment benefi ts and provisions for retirement) blurred the boundaries with
the centre-right, strategic uncertainty (illustrated by the SPD’s approach to the Left Party
leading to the debacle following the Hessen state elections in 2008) undermined the party’s
credibility. The resulting political catastrophe inspired a raft of political commentary
– from Der Spiegel to the British Financial Times – that speculated on the ‘end of social
democracy’ (Dahrendorf 1990).
Although we would not wish to understate the devastating nature of this defeat,
we argue that it must be placed into the wider context of longterm developments in
German and European politics: the decline of the German catch-all parties (and rise
of the three smaller parties); and, the changing role of political parties in general and
social democratic parties in modern politics. The fi rst section of this article will address
1 William E Paterson is Honorary Professor of German and European Politics at Aston University.
Dr James Sloam is Senior Lecturer in Politics and International Relations at Royal Holloway, University
of London.
41

the rise and fall of the SPD in the 1990s and 2000s. We then turn to the bigger picture,
placing the SPD’s defeat within the framework of European social democracy. In that
context, we draw parallels with the survival (and likely demise in 2010) of the New
Labour project in the UK.
42
THE RISE AND FALL OF THE SPD
1. ‘Loosely Coupled Anarchy’ (Lösche 1993)
The predictions of the demise of social democracy in Germany and elsewhere in Europe
are not new (e.g. Przeworski 1985; Dahrendorf 1983), but have often been overstated
(Paterson and Sloam 2007). The German SPD from the mid 1980s to the mid 1990s was
riven by internal tensions, suffering from organisational, ideological and strategic pluralism
(Lösche 1993; Sloam 2004). Organisational pluralism allowed ambitious Länder
princes i.e. Oskar Lafontaine, Rudolf Scharping and Gerhard Schröder, to agitate against
each other and offi cial party policy from their regional powerbases. Ideological pluralism
came about with the rise of the new post-materialist left, who were often ill at ease with
the economic orthodoxy of the federal party in Berlin (and defi ned themselves through
their opposition to nuclear weapons and the participation of the Bundeswehr in ‘out of
area activities’). Ideological pluralism was mirrored by strategic uncertainty – in particular
the party oscillated between appeals to the centre-ground (CDU/CSU voters) and the
post-materialist left (Green voters).
2. The Rise of the Neue Mitte and the Fall of the SPD
One solution to the problems of the 1980s and 1990s was the dual leadership of Lafontaine
(appealing to the left and core voters) and Schröder (appealing to the centre and
fl oating voters), which together mobilised enough support for the SPD to come to power
in 1998. 2 Once Lafontaine had resigned as Finance Minister and party chairman in 1999,
the way was open for the SPD to move to the centre in government in the strategic and
ideological direction of the ‘Neue Mitte’. This began in earnest after the party’s reelection
in 2002 in the form of the ‘Agenda 2000’ reform programme.
Under the Schröder chancellorship, the strategic purpose of the SPD was transformed
from a ‘catch-all party’ to a ‘rally party’ in support of the Chancellor (almost a ‘Kanzlerwahlverein’).
This was illustrated by Schröder’s attempts to put his own fate ahead of
the party in the game of coalition poker pursued shortly after the 2005 election. Agenda
2010, the centrepiece of the second Schröder government, nevertheless proved to be a
step too far for the party. Reform of the benefi ts system (symbolised by the so-called
‘Hartz IV’ laws and an increase in the retirement age) resulted in the implosion of SPD
membership, a collapse in support for the party in the polls, and enabled the eventual
emergence of the Left Party (a force on the left that could challenge the SPD for votes
across the country).
2 The so-called leadership ‘Troika’ was completed by the dull but reliable Scharping (as head of
the parliamentary party). Fast forward to 2009 as Nahles (representing the left) takes on the role
of General Secretary with Gabriel (rhetorically appealing to the centre-ground) as party chairman
with Steinmeier as chair of the parliamentary group.

3. ‘Failing successfully’ in the Grand Coali-tion (the rise of the technocrats)
Aided by Schröder’s charismatic leadership and brilliant campaigning skills, the SPD
was able to achieve a competitive result and enter government in 2005, despite the fact
that the party had lost four million votes (approximately 20% of SPD voters) and nearly
a quarter of its members in only seven years (SBD 2009b; SPD 2009). However, within
the Grand Coalition, the SPD lacked both Schröder’s ability to lead the party from the
centre and the luxury of being able to fall back on its core support. Successive chairmen
of the party – Franz Müntefering (twice), Matthias Platzeck, Kurt Beck, Frank-Walter
Steinmeier (as acting chair) – failed because they were not capable of differentiating the
SPD from the Grand Coalition dominated by Angela Merkel. The technocratic leadership
of Müntefering and Steinmeier was effectively fenced in by a Chancellor who was
happy to steal the centre-ground from the junior coalition partner and an opposition
Left Party that successfully mopped up SPD voters disaffected by the party’s role in the
Grand Coalition. While centrist welfare and labour market policies – such as the raising
of the retirement age to 67 (pushed through by Müntefering as Minister for Labour and
Social Affairs) – gained no new voters in the centre, more traditional left-wing policies
– such as the introduction of a basic minimum wage in a few sectors of the labour market
– gained no new voters on the left. Agenda 2010 and participation as the junior partner
in the Grand Coalition has essentially robbed the SPD of its identity as the party of social
justice. The leaders who had helped to pioneer these reforms and led the SPD in government
thus lacked the credibility to mobilise the party’s support base.
PUTTING THE DEFEAT INTO CONTEXT
1. The Bigger Picture: the decline of the Volksparteien
Although the decline of the SPD has been dramatic since 1998, losing approximately
half of its voters and a third of its members (SBD 2009a and 2009b; SPD 2009), the defeat
must be put into context. First, the SPD was in power for eleven years. One of the reasons
why governments tend to have a shelf-life is that they inevitably lose some of their
distinctiveness within the constraints of government. In this sense, opposition can be
seen as an opportunity for renewal. Second, the decline of the SPD must be related to the
steady decline in the fortunes of both Germany’s catch-all parties. In federal elections,
the CDU/CSU and SPD combined scored on average over 90% in the 1970s, 85% in the
1980s, 77% in the 1990s, and only 68% in the current decade (SBD 2009b). The CDU/
CSU received almost two million fewer votes in 2009 than in 2005 (losing over 10% of its
voters) and almost six million votes fewer (nearly 30% of its voters) than in the historic
unifi cation election of 1990 (SBD 2009b). So, what we have seen is a gradual evolution
away from the two-and-a-half party system that characterised the Bonn Republic towards
a more complex fi ve party system, opening up the possibility even of three party coalitions
(as in the case of the new CDU-FDP-Green ‘Jamaica’ coalition in the Saarland). Are
we seeing the ‘normalisation’ of German party towards a European model of bloc politics
(Poguntke 2005)? As yet, we cannot be sure. 3 Certainly the SPD will have to have a more
3 Interestingly, there has been relatively little change in share of the vote between the left (SPD-
Green-PDS/Left Party) and right (CDU/CSU-FDP) blocs in recent elections. In the three elections
between 1998 and 2005, the SPD-Green-PDS/Left Party vote captured between 51% and 53% of the
vote. In 2009, the share of the vote captured by the Left fell below 50% for the fi rst time since 1994.
43

fl exible attitude to potential coalition partners (including the Left Party) if it stands a
chance of returning to power in the near future.
44
2. The Bigger Picture: European Social Democracy
It is helpful to take a further step backwards, to look at the bigger picture for European
social democracy. Social democracy is certainly in decline if one looks at the political
map of Europe today compared to the highpoint of 2000 when centre-left parties were
in power in twelve of the fi fteen EU states. Yet the comparison is unfair, as it ignores the
cyclical nature of party politics. Between 1993 and 1997, social democrats were in opposition
in the EU big three (France, Germany and the UK) and after the time of the UK
general election (probably in summer 2010) we are likely to be back in the same situation.
Furthermore, as others have shown (Merkel 1993), the poor performance of centre-left
parties in the 1980s and 1990s was never the full story. During this period social democrats
were dominant elsewhere in Europe e.g. Spain, Sweden. Today we should therefore
talk of the retreat rather than the defeat (and certainly not the end) of European social
democracy. The re-election of Jose Zapatero and the Spanish Socialist Party in 2008, the
victory of the Greek Socialist Movement (PASOK) and of the Norwegian Labour Party
this year all show that national political and economic circumstances are paramount in
the success of individual parties.
On the other hand, the defeat of the SPD does show the limits of revisionism for social
democratic parties. Here, the story is not dissimilar to that of New Labour in the UK.
For social democratic parties to move to the centre and recast social democratic values in
new policies, they require a strong charismatic leader (e.g. Blair and Schröder) capable of
establishing a direct relationship with voters and individual party members (so obviating
traditional party organisational structures). That leader then pursues a reformist path in
government, but at the cost of alienating the party’s core supporters. There is a natural
shelf-life for this type of leader – eventually their political capital runs out (e.g. Blair over
Iraq, Schröder over Agenda 2010) and their charisma wears thin. The new, less charismatic
leaders who replace these reformers (e.g. Brown and Steinmeier) are then unable to bring
back core supporters because they either: a) lack credibility/trust (i.e. returning to core
values when they have helped pioneer revisionist policies); and/or, b) lack the charisma to
unite the party or the country. Meanwhile, centre-right parties moved towards more centrist
policies (Merkel after the failure of the ‘Leipzig agenda’ in 2005 and David Cameron
in the UK) claiming to be ‘compassionate conservatives’. The correction of the paths of the
SPD and the British Labour Party in opposition - towards more traditional social democratic
values – is, thus, highly likely. 4 We might even decide to call this the ‘revisionist cycle’.
In the battle of ideas the New Labour/Third Way/Neue Mitte agenda is terminally enfeebled.
It had overinvested in globalisation without bringing obvious benefi ts to its core
supporters. At present the poll fi gures for Labour make grim reading, so that a victory in
the next election appears unlikely. The UK Conservative Party, which had planned a ‘son
of Blair’ strategy, were wrong-footed by the fi nancial crisis and have retreated somewhat
from ‘compassionate conservatism’ to a leaner state agenda much closer to their traditional
goals. If the view continues to gain ground that the Conservatives are using the crisis to
push an ideologically driven narrow interest agenda then they could fi nd themselves as
4 Although the return to ‘core values’ may be less likely in the British Labour Party than in the
German SPD, given the centripetal force of the UK’s ‘fi rst-past-the-post’ electoral system.

unpopular as Mrs Thatcher was till she was rescued by the Falklands. This is only likely to
happen after an electoral defeat and the replacement of an exhausted Labour leadership
and the adoption of a slightly more socially protectionist agenda by a new leadership.
Of course, European social democracy does face some genuine structural problems.
The prediction of the demise of social democracy by Dahrendorf and others was founded
on the fact that society had changed i.e. the shrinkage of the blue-collar workforce, voter
dealignment, and the individualisation of values and lifestyles (Giddens 1991; Inglehart
1997), and that mass membership workers’ parties would not be able to cope. There is certainly
some truth in the assertion that the typical social democratic organisational model
(bottom-up power structures crystallised in the party conference and supported by a large
membership base) has been threatened by these changes. Mair and Van Biezen (2001) dramatically
depict the collapse in party membership across Europe in recent decades. In this
regard, the hierarchical party structures more often found in parties of the centre-right are
perhaps more effi cient in an age of individualisation and the 24-hour media.
As we have argued previously (Paterson and Sloam 2007), one the reasons why many
social democratic parties were only ‘failing successfully’ in the late 1990s, was because they
had had neglected underlying ‘linkage’ issues with core supporters (Lawson and Merkl
1988). Centre-left parties need to re-think the ‘social’ dimension of social democracy. The
missing ingredient of the Third Way and the Neue Mitte was the communitarian aspect
of progressive politics – building up democracy form the grassroots up through horizontal
relationships between voters and the state that stress rights and obligations. 5 From a
party political perspective, revisionist social democratic parties did not recalibrate party
organisational structures to encourage the socialisation of new members and supporters.
In the personalised, hierarchical leadership networks established by Schröder and Blair,
there was little room for or attention paid to this approach. 6 One small example would be to
remove the bar of membership from access to SPD (or Labour Party) online communities.
In terms of party identity, European social democratic parties need to develop new
identities in their domestic environments that appeal to the new milieus in the centre
of the society. They need to offer more than technocratic competence. Whilst it is sometimes
enough for the centre-right to appeal to citizens’ wallets, the centre-left must appeal
to citizens’ hearts as well. The big challenge for European social democracy is how
to re-defi ne policies when the spending cuts come (as they inevitably will given the surge
in defi cit spending since the onset of the global fi nancial crisis in 2008). In this context,
social democratic parties must sharpen their focus on core areas of social investment. If
they can do this, it may be a strategic advantage to be in opposition when the axe falls on
public services (in Germany as elsewhere). When the axe does fall, it may also provide
a window of opportunity for the social democratic parties to achieve policy goals at the
EU-level that promote social cohesion though the weakened position of the Socialists in
the European Parliament is a weakness.
5 In the words of President Kennedy: ‘ask not what your country can do for you, but what you
can do for your country’.
6 The Obama campaign of 2008 in the US showed in an innovative way how political so-cialisation
might be achieved through the use of the new media. To remain a catch-all party, so-cial democratic
party organisations need to be opened up. Of course, the opening up of social democratic
parties to new political, economic and social groups is not a new phenomenon e.g. Willy Brandt’s
integration of new political forces into the SPD in the 1960s and 1970s. On the other hand, maybe
a party needs a Brandt or an Obama – a ‘charismatic unifi er’ – to make this possible.
45

46
CHALLENGES FOR THE SPD
The SPD faces a number of challenges – organisational, ideological, and strategic.
First, it needs to fi nd the right personnel to keep activists happy, mobilise core supporters
and appeal to the centre (the Gabriel-Nahles-Steinmeier axis seems to move in this
direction if the protagonists can actually work together) and, above all, be able to communicate
their message. One complication here is Steinmeier’s reluctance to disavow
Agenda 2010. The party needs to build up support at state and local levels, to provide a
springboard to power at federal level. Here, the Land Election in North-Rhine Westphalia
in May 2010 is crucial. In organisational terms, the party needs to open up its structures
and encourage outsiders to come in as it tried to do (unsuccessfully) in the 1990s
(Blessing 2000) and again in 2001 (Machnig 2001) e.g. the idea of primary elections for
parliamentary candidates and party leaders. The use of projects to engage non members
is already widespread.
To achieve these goals, the SPD requires a clear narrative. This may involve ideological
adjustment. It should not, however, focus on policies of the past e.g. Hartz IV and
retirement at 67, but concentrate on the development of a forward-looking social democratic
identity: In short, a progressive, socially liberal position in favour of a state that
ensures equality of opportunity (e.g. focus on education) social cohesion (‘fair’ taxation
and social legislation). Furthermore, this position will have increasing resonance once
the public spending cuts come.
How the new narrative is deployed – at the next stage – will depend on strategic
choices. At this stage, however, the party should concentrate on re-motivating the two
million SPD supporters who voted in 2005 but stayed at home in 2009. All things being
equal, this would make the party competitive with the CDU/CSU. Within a multiparty
system it would be unwise to think too much about strategic options (although fl exibility
is required). After all, their competitor parties have challenges of their own – the Christian
Democrats in government must manage the ‘gathering crisis’ public expenditure
(and take responsibility for large spending cuts). The Left Party must hold together in
the context of ongoing tensions between East and West and the strains of drafting a new
programme. The Green Party, a winner in the Federal Election have the fewest challenges
and are now a much desired coalition partner.
So, in the face of the humiliation in the 2009 federal elections, what should be the
central goals for the SPD? The rehabilitation should concentrate on re-organisation and
mobilisation – developing and communicating a distinctive policy – rather than moving
too much to the left or centre though a move to the left will be inevitable in the run up to
the Land Election in North Rhine Westphalia in May 2010
CONCLUSION
With the exception of the period of the fi rst postwar Labour Government and the early
days of the Blair Government the SPD has been the most infl uential party in European
social democracy for over a century. The defeat of the SPD in September thus weakens
social democracy for the foreseeable future. Perhaps as importantly the poor showing of
the SPD in the Euro-pean elections and the shrinking of the Socialists in the European
Parliament seriously constrains the impact of social democracy. It is however not the end

or even the beginning of the end of social democracy. It is rather part of a general crisis
of political parties in representative democracies. The weakness of the right of centre
parties in the battle of ideas is as striking as that of social democracy What social democracy
now needs are a new generation of charismatic leaders, a post crisis narrative and
new more porous and responsive structures. These are more likely to develop in opposition
than government.
The views expressed in this article do not necessarily refl ect those of the FES London.
ViSdP (Person responsible according to the German Press Law): Karl-Heinz Spiegel, Di-rector, FES offi ce
London.
47

German Economy – Global Economy
– World Economic Crisis

CONTROLLING THE RISKS OF A GLOBAL ECONOMY
Michael Dauderstädt & Christian Kellermann
This article authored by Michael Dauderstädt & Christian Kellermannwas
was originally published by Friedrich-Ebert-Stiftung, Department for Development
Policy, Berlin, 2007
ABSTRACT
The integration of the German economy with the global economy contributes strongly
to the economic dynamics and prosperity within Germany. As world export champion,
Germany benefi ts from open global markets for goods, services, capital, enterprises and
labor. At the same time, liberalization has weakened many national, governmental regulatory
competences, except for those that have been transferred to the level of the European
Union as part of the integration process. Germany’s one-sided export orientation,
as well as the increasing infl uence of international capital markets in the corporate and
banking sectors, contain a number of risks for its own national economy, and also, in
the worst-case scenario, for the stability of the global economy. The bottom line, however,
is that Germany has benefi ted from globalization. Those problems that Germany’s
economy is currently experiencing (limited growth, unemployment, rising inequality)
may be attributed to a complex interaction between foreign economic developments and
national economic policies, and cannot be resolved by reducing Germany’s integration
in the world economy.
During the next decade, the essential risks in the global economy will mostly consist
of an uncontrolled collapse of the US dollar and weak global demand. In Europe and
the rest of the world, purchasing power of the masses will be reduced, triggered by lagging
wages and a tendency to save, both driven by the risk of under-regulated markets;
we may also face an uncoupling of productivity and output. The approach of German
foreign trade policy towards controlling these risks is a strengthening of the European
Union as the regulating entity of the regional markets most signifi cant to Germany, and
the bundling of individual European votes for the creation of a rule-based, regulatory
global governance. Germany, as a major voice in the EU and world economy, can help
advance improved regulation of the global markets – especially capital markets and
their players – and thus mitigate the loss of effectiveness of its national economic policy.
In the long-term perspective, the support of a sustainable global trade regime and the
entrenchment of global minimum social protection rights will be essential elements in
German foreign economic policy.
I. THE GLOBALIZATION OF GERMANY
Foreign economic relations have an increasing infl uence on whether or not, and
how Germany achieves its goals, in particular, a level of prosperity, which satisfi es current
demands. Through its active participation in global policies on liberalization and
51

integration, Germany has opened its markets to goods, services, capital, enterprises
and labor, while waiving numerous national capacities to control these markets. On the
other hand, many partner countries have taken similar steps, providing opportunities
for Germany’s economy on their own markets. This process has most advanced within
the European Union, and particularly in the Euro zone. Germany’s role in the global
economy essentially depends on the developments in other countries and regions,
and is thus exposed to a series of risks. However, the bottom line is that Germany’s
economy has benefi ted from this development. Inasmuch as Germany’s economy is
currently experiencing problems (weak economic growth, unemployment, increasing
inequality), these may be attributed to a complex interaction of foreign economic developments
and national economic policies and cannot be resolved by reducing Germany’s
integration in the world economy. Even though a better regulation of global
markets might very well contribute to alleviate the loss of effectiveness of its national
economic policy.
52
I.1 Multi-Level Policy of Global Regulation
Germany has transferred major politico-economic competencies to supra-national
institutions and international regulatory authorities. Consequently, its real economic integration
has massively increased, which – in connection with inappropriate national
responses – has resulted in some problematic integration effects. Germany’s ability to
control production factors and the fl ow of goods crossing its borders, or even to regulate
global markets, has been rather diminished. With the extensive globalization of the
German economy, the level of policy making in general, and German foreign economic
policy in particular, has shifted. For the most part that means it has been internationalized.
On one hand, a number of formerly national responsibilities have been transferred
to the international level. On the other hand, there are numerous international actors,
such as international organizations and global players, all acting within the confl ict-ridden
arena of globalization. In this constellation of actors, there are regular occurrences of
tension and disagreements regarding the degree of economic liberalization versus market
regulation. The following section briefl y analyses the various levels and actors within
the global economy.
The regulation of Germany’s foreign trade relations is meanwhile mostly subject to
the European Union (EU), in which Germany may play a major role, but in the end has no
veto right – here, in the `fi rst pillar´ of the interior market especially. The competencies
of the European Union concerning economic policy extend to customs duties and trade
policy, single market policy, and to monetary and currency policy.
Transfer of competencies is even further advanced within the Economic and Monetary
Union (following the Maastricht Treaty of 1992). In 1999 the European Central Bank
(ECB) as the new, supra-national actor determines the common monetary policy of the
Euro zone and decides on the interest rate for the entire currency area. The ECB also
monitors the exchange rate of the Euro and is thus an important actor in international
fi nance. On the fi scal side, the Stability and Growth Pact (SGP), as the link between the
EU - and national levels, specifi es limits to budget defi cits and overall debt.
Multi-national corporations (MNCs) are the driving forces behind the liberalization
of global trade in goods and services. Most of the MNCs are based in the US, Japan or
Europe. Increasingly, they have become actors in international policy, as they are able to

play locations (nations) against each other by simply threatening to relocate their production
facilities. `Market states´ (“Wettbewerbsstaaten”) try to attract investors with
competitive tax systems, legal standards, or direct subsidies. By virtue of the MNCs’
being active in several legal systems, intervention and regulation by individual states is
only possible on a limited basis. Instead, regulation, monitoring and taxation of MNCs
demand international cooperation and global regulation, for instance, concerning the
enforcement of certain environmental and social standards. Most of the regulation for
MNCs today consists of codes of behavior and is primarily of voluntary nature and cannot
be legally enforced.
The infl uence of large market actors is mostly of a structural nature. This is true especially
in the fi nance sector, due to the specifi c creditor/debtor relations (via the capital
market), and contrasts with regulatory concepts of many individual states. Powerful lobbying
associations exert a kind of disciplinary effect on the agenda of the Bretton Woods
Institutions, and especially on developing countries, for which access to the international
capital market is a crucial factor for development and industrialization. But even as individual
actors, large institutional investors (investment banks, insurance companies, fund
managers, hedge funds) are in a position to use the sheer size of their funds and/or credit
leverages to plunge both developing and industrial nations (e.g. Great Britain in 1992 or
the US in 1999) into a fi nancial crisis, necessitating concerted, multilateral counteraction
as a reaction.
The central political actors in global economics are the governments of the major
industrial nations (G8). The single most important actor in the world economy is the US
government, whose unique status is institutionally set, as, for example, in the quota system
of the Bretton Woods organizations, and through which the US alone has a veto right
in the central decisions of these organizations. The global monetary function of the US
dollar is the critical instrument in the US status, providing the US with a `seignorage´
advantage 1 , permitting the internationalization of its own macro-economic preferences,
and allowing it to dominate international fi nance and trade structure. The infl uence of
the US in determining the rules of the game on the global markets continues to exist,
despite many voices to the contrary, providing little hope for any multilateral regulation
of the global money markets, in deviation from the liberal credo.
Following the example of the G8, additional “G fora“ have been established: In 1999,
a group of `systemically signifi cant´ developing -and emerging countries as well as industrial
nations formed the G20. Among others, the G20 include China and India. This
forum represents two thirds of the world population, 80 percent of world trade, and
90 percent of the gross national product worldwide. In the fi nancial sector, there is the
Intergovernmental Group of 24 for International Monetary Affairs and Development,
G24, abbreviated: It is a group of developing -and emerging countries in the IMF, representing
common interests in monetary, fi nancial and development issues in the Bretton
Woods Institutions and other fora. Both of these fora play signifi cant roles in the global
economy, although neither the G20 nor the G24 present any signifi cant counterweight to
the G8 dominance. They still primarily serve the generalization and legitimizing of the
1 The seignorage advantage describes the specifi c function of the leading currency: The issuer
of the world’s reserve currency may pay its obligations abroad in its own currency. Thus, the issuer
of the global currency benefi ts from the unique seignorage advantage - tempting certain abuse – of
being able to force foreign holders of the key currency to fi nance their domestic budget defi cit.
53

economic policy goals agreed upon in the G8. However, emancipatory tendencies are
becoming clearly evident.
There are a number of international organizations performing as actors in the global
economy. Noteworthy in particular are the World Trade Organization (WTO), the International
Monetary Fund (IMF), the World Bank Group (IBRD/World Bank), the Organization
for Economic Cooperation and Development (OECD), and many more. 2 With the
(preliminary) failure of the Doha Development Round of the WTO, multilateralism in
trade issues is also exposed to rising pressure.
In the fi nancial sector, the International Monetary Fund in particular is struggling
for its function as a lender of last resort for developing - and emerging countries. However,
it suffered a major loss of credibility at the beginning of this decade through its
extensive resistance to reform and was increasingly perceived as a unilaterally operating
instrument of the US government and powerful market actors. This led to skepticism
and counter-reactions, especially in the Asian region, but also in Latin America, and in
the end caused a crisis in the international fi nance diplomacy. Through the Chiang-Mai
Initiative (the bundling of monetary reserves in Asia) and the early repayment of outstanding
loans by Latin American countries, emerging economies became increasingly
independent of the IMF and accelerated a tendency towards regionalization. In addition,
with China and India, but also other large emerging economies (such as Brazil), new
players emerge who demand a corresponding voice in the international organizations as
well. The concessions of the industrial nations to date, however, have been rather marginal
– at the Singapore Meeting of the Bretton Woods Institutions in September 2006,
only China, South Korea, Mexico and Turkey were awarded a small increase of their quotas.
Germany’s representatives supported the increase and demanded additional reform
steps such as the simplifi cation and adjustment of the quota assessment in the Bretton
Woods Institutions.
Non-governmental organizations (NGOs; also referred to as non-profi t organizations),
which are critical of globalization, criticize many policies of the international organizations
(catch word: Washington Consensus). And they also criticize the limited progress
in advancing the voting rights of developing and emerging countries within these organizations.
As a basic principle, they support a much more comprehensive legally binding
regulation international economic relations. For this, universally and democratically
legitimized multilateral fora are needed, which also admit NGOs. It is largely thanks to
modern communication technology, that NGOs have become instrumental in providing
impetus in international economic relations. However, their infl uence is limited due to
the insuffi ciency of their resources and access to state fora and public organizations.
Their strategic weaknesses are partially due to the internal rivalry between reform-oriented
actors and more fundamental opponents of globalization. The strength of the entire
movement lies is in its ability to mobilize major protest actions, as those seen prior to the
most recent WTO, G8 and IMF/World Bank conferences.
Following the development of a global fi nancial market and its growing importance
in the fi nancing of states and enterprises, the balance of power between the various
actors has shifted on the side of major institutional investors and MNCs, which fre-
2 International Organization of Securities Commissions (IOSCO), International Association of
Insurance Supervisors (IAIS), Bank for International Settlements (BIS), Basel Committee on Banking
Supervision (BCBS), Committee on the Global Financial System (CGFS), Committee on Payment
and Settlement Systems (CPSS), Financial Stability Forum (FSF) etc.
54

quently act as bank-like institutions themselves. Individual governments increasingly
run the risk of their countries acting as competitors for large investors, subordinate to a
supply-side catalog of policy demands. Tendencies towards regionalization are becoming
more and more evident, on the one hand cushioning competitive pressure (as in the
EU), on the other hand, decreasing the dependency on the international organizations
(e.g. through the Chiang-Mai Initiative). The observed informalization (`G-zation´) of
international economic diplomacy and the marginalizing of international economic
and fi nancial organizations add to the diffi culties. The consequence is an increased
tendency towards noncooperation, which may have negative consequences, especially
for Germany with its comprehensive integration in world economy. The German (regulatory/institutionalist)
approach has always consisted of a strengthening of multilateral
systems and international organizations, with the goal of assessing, processing, and
distributing relevant information. It has also been a “German way” to allow for stable
expectations on the part of individual actors, and a rule-based resolution of confl icts.
Neither the WTO (which has a formal arbitration mechanism for dispute resolutions),
nor the international fi nancial institutions have made fundamental progress in settling
confl icts of interest or establishing global regulatory measures. Institutional surrogates
and parallel fora, such as the Financial Stability Forum, may be instrumental in formulating
standards, codes, and other behavioral rules, but cannot substitute for internationally
binding rules such in the shape of an IMF article or WTO agreement. In global
trade, this has already manifested in a creeping undermining of the principles of open
markets and non-discrimination.
Germany’s options for exerting a direct infl uence on these issues are limited to its
participation in the G fora and the international organizations in which the government
(typically the fi nance minister and/or the president of the federal bank) is represented –
primarily the Bretton-Woods Institutions. Otherwise, Germany’s infl uence is channeled
through its work within the EU.
Against this background of shifts within the balance of power in international economic
diplomacy, the following section outlines the integration process of the German
economy in the world market to date, and its impact on German economic policy. We are
primarily concerned with qualifying the German globalization process, thereby providing
the basis for the later analysis of scenarios, specifi cally: What are the strengths compared
to the vulnerabilities? We assume that many weaknesses in the German economy
are homemade and only indirectly linked to globalization.
I.2 Global Economic Integration
Since 1952 Germany has had a trade surplus, which it uses to fi nance regular defi cits
in services (primarily tourism) and net payments to foreign entities (including development
aid, contributions to the EU and other international organizations). The remaining
(frequently still positive) balance then leads to an increase (or, if the balance is negative,
a decrease) of Germany’s net foreign asset position. Germany has the highest export of
goods worldwide and one of the highest foreign trade surpluses worldwide.
The majority of German foreign trade consists of manufactured goods (app. 60 percent
of imports and app. 75 percent of exports). The energy imports (oil and natural gas)
so fervently discussed in recent years amounted to only 6.8 percent of all imports in 2004,
and commodities to slightly more than 8 percent. However, the percentage of commodi-
55

ties has clearly increased since 1999, when it was still app. 5 percent. In the long run, the
share of manufactured products may diminish if services continue to gain importance
in international trade, as they already have within the domestic economy. Continuously
rising prices of raw materials may increase their value share in the short term, but have
a long-term tendency to decrease their volume share of imports, and thus their value
share, too.
Germany’s main trading partners are therefore the other rich industrial countries. In
2004, German imports from China were still below those from Great Britain, but China
has grown increasingly important in recent years. Since 1998 it has almost tripled its
exports to Germany, while the total of German imports has only risen by app. 36 percent.
On the other hand, German exports to China are increasing at an even faster rate.
As a result of the transformation of post-communist economies and the EU’s eastward
expansion, trade with central and eastern Europe has also increased. Its share of German
imports rose from below 3 percent in 1990 to almost 10 percent in 2003, but this dramatic
growth has probably reached its zenith. Germany was the benefi ciary of the world trade’s
tendency towards regionalization here, the further progress of which, however, is likely
to take place in regional markets less accessible to Germany.
Capital market integration between Germany and foreign countries has also increased.
German fi nancial institutions, corporations and households have invested abroad, and,
in return, foreign investors have acquired assets in Germany. In this process Germany is
basically a creditor nation, whose assets abroad exceed its liabilities, if only by 6 percent
of the gross national product, whereby German private assets are counterbalanced by
public debts owed to foreign creditors. Investments by foreigners in Germany are for the
most part fi nancial investments, which as such have no direct infl uence on growth and
employment, but initially only change control of the enterprises involved. In the long
run, however, such changes in corporate control, especially in the rather rare case of a
majority participation, may lead to a new corporate strategy, which then may have an effect
on growth and employment. 3
German foreign direct investments are also quite rarely `Greenfi eld´ investments,
which create new production and employment in foreign countries. It’s even more diffi
cult and rare to identify true production relocations, where stages of production and
the jobs associated with them are clearly transferred from Germany to a foreign country.
This does not, however, preclude the rise of German corporate activities abroad. Foreign
investments are often only a part of forming cross-national production networks and
value-added chains, which themselves are responsible for an increasing portion of the
international trade.
3 This trend should be assessed quite critically: With the divestiture of the so-called `Deutschland
AG´ [Germany Inc.] (divestiture of fi nancial and industrial capital), the increasing signifi
cance of the shareholder value of a company is accompanied by a strategic realignment of the
corporate governance in corporate groups and banks. A corresponding one-sided emphasis on
above-average-profi table corporate sectors has negative employment implications, at least in the
short - to medium range, and undermines corporate tradition. In order to speak of a long-term
trend in this context, the capital market would have to assume a central role in fi nancing corporations,
and company shares would have to be held by strategic, institutional investors – a trend we
are currently observing. In this regard, the interest of the fi nancial market is increasingly focused
on Germany.
56

Aside from the markets for goods, services and capital, Germany is also involved in
the – albeit signifi cantly less integrated and liberated – international labor market. In
the past (1955 – 1975), Germany had recruited ”guest workers” from foreign countries
to a very large extent. Thereafter, immigration primarily took place for different reasons
(resettlement from Eastern Europe, refugees, family reunions, etc.), although highly
qualifi ed foreign workers were still occasionally sought. Inside the European Union, the
Free Movement of Workers prevails, which should extend to the new eastern European
member states by 2010. Beyond that, some observers hope that the increase in immigration
might mitigate of the, in their view, demographically-driven problems within the
German economy.
I.3 Homemade Failures in Dealing with Globalization
Germany is suffering from a general tendency towards weak growth, combined with
persistent, massive unemployment and increasing inequality. In light of the vast success
in export and, simultaneously, the better labor-market and social performances of other
rich welfare states, it is only natural to assess the German problems as less a direct effect
of fi nancial and economic globalization and more as the result of homemade errors
in policy. In particular, Germany was unable to transform its gains from specialization
– through the altered, international division of labor - into growth and employment.
To do so, it would have been primarily necessary to offer the redundant workers from
the declining sectors (typically industries – e.g. the textile industry – and production
processes which, exposed to international competition, use lots of low-skilled labor) new
employment. This would have increased output and income. Instead, redundant work
forces were often dismissed to long-term unemployment or early retirement, having to
be fi nanced through a re-allocation of funds from stable or expanding industries. The
necessary expansion in domestic labor demand failed, due to economic conditions on the
European level, which are unfavorable to Germany. Both the Maastricht criteria and the
monetary policies of the ECB slowed down German economic growth through high real
interest rates and restrictive fi scal policy, thereby increasing the pressure on business to
push exports and cut labor costs.
What effects do the energy -, i.e. oil shock, the rise of China and India, the oversupply
of manufactured goods, especially from low-wage countries, and the excessive demand
for raw materials produce? They obviously have not led to a defi cit in the current account
balance, but they have worsened the terms of trade. The growing import of labor-intensive
fi nished -and semi-fi nished products will continue to put a strain on the job market,
but also provide opportunities for increasing prosperity. The Sinn theory of a `Bazaar
Economy´ is not only empirically doubtful, but also problematic in a theoretical and
political sense, since its consistent application would require a radical strategy of import
substitution.
What implications for foreign economic relations does Germany’s other major
sociopolitical challenge, its demographic development, have? In principle one might
assume that in future the then older German population will consume more than it
produces. If this does not take place because a socially oriented, highly productive and
active population is willing to fi nance the older citizens’ consumption, no new foreign
economic challenges would result. If it does, however, imports would increase, and a
defi cit in the trade balance may be expected, which would be easier to fi nance, if Ger-
57

many had previously developed strong, positive net foreign asset positions. However,
such long-term investments are subject to signifi cant risks, in particular since the ideal,
demographically speaking, target countries with high population growth are mostly
unstable.
Whether or not immigration can solve such problems is also questionable. It would
have to consist of well-qualifi ed people, of whom there is an insuffi cient supply worldwide,
since countries with a comparable educational level possess similar demographic profi les,
and since Germany competes with many similarly structured nations for this limited supply
of potential immigrants with suitable qualifi cations. As long as simultaneously less
qualifi ed German workers remain unemployed, domestic tension is inevitable.
58
II. STRATEGIES OF GERMAN FOREIGN ECONOMIC POLICY
As described in the opening section, many of former Germany’s economic policy
competencies are now located in Brussels and Frankfurt. However, the formation, distribution
and enforcement of German policy positions are primarily conducted by the
Federal Ministry of Finance, the Federal Ministry of Economic Affairs and Technology,
The Central Bank (Bundesbank), the Federal Ministry of Economic Co-operation and Development,
and the Federal Foreign Offi ce. Some of the individual policy proposals are
heavily contested between the individual departments. German foreign trade policy is
further characterized by a close cooperation with partner countries featuring a similar
regulatory bias, and also by the integration of globally linked, moderate NGOs, domestically
and on an international level.
German foreign economic policy to date has consisted of a liberally oriented, multilateral
approach through which key preferences, such as the independence and monetarist
approach of the European Central Bank, were internationalized. Germany’s
long-term strategy, on which the approach is based, is the mercantilistically inspired
advancement of its export business. Thus the strategy of a strong currency serves to
force exporters to engage in price discipline and quality improvements. From this perspective,
there is no contradiction between export and hard currency orientation. The
reverse side of this strategy is domestic economic self-discipline. Devaluation together
with a boost in domestic demand would create the danger of additional infl ationary
pressures.
The multilateral approach of implementing a stronger regulatory regime is especially
noticeable in trade policy (responsibility of the EU) and in the German fi nancial
diplomacy of recent years (relatively independent of the respective governmental
constellation). Based on an institutionalist understanding of the economy, an attempt
was made in the fi nancial sector to correct market distortions and information asymmetries
through binding global regulation. The German position on this issue has usually
differed from that of the US administration. The virtual preponderance of the US
in international fi nancial institutions and their infl uence – often aligned to interests
of its domestic fi nance business – not only intensify systemic dysfunctions of international
fi nancial markets, but also cast doubt on the Bretton Woods organizations and
the multilateral system as a global Leitmotiv. Germany’s approach of the last 10 years
for a stronger independence of the international fi nancial institutions is defi nitely the
move in the right direction. The corresponding measures proposed such as an increase

of internationally legal regulation, and a restriction of the discretionary infl uence of
powerful governments match this goal. As an individual country, however, Germany
is relatively powerless to transpose more fundamental changes in the international
fi nance architecture. As in the fi eld of exchange rate policy, this demands the participation
of the EU, in this case, via Brussels. A common foreign economic policy with the
EU performing as a single actor would represent a serious institutional counterweight
to the US, even though no essential changes within the fi nance system can be enforced
against the institutionalized veto rights of the US.
German initiatives, like for example the pressure to set up the Financial Stability
Forum, have been a result of the institutional dominance of the US in the established
organizations. However, in the end their infl uence is relatively minor, since those types
of fora are not binding to the actors (neither market actors nor governments), and the
standards and codes created therein regarding issues of transparency may even have the
counterproductive effect of stymieing more extensive and binding demands.
Germany’s policy approach further consisted in the support of debt relief for heavily
indebted poor countries (HIPC Initiative) and the Millennium Development Goals of the
United Nations. In the Doha Round, Germany (or better: the EU) also demonstrated a
willingness to compromise on lowering agricultural duties, thus taking an important step
in the direction of developing and emerging economies. The Doha Round initially failed
because of the US refusal to offer more extensive reductions in subsidies. With regard to
the new powerful actors in the global economy, the strategy of involving large emerging
economies into the `Industrial Nations Club´ presents a guiding principle of the German
government.
Based on the above-mentioned trends in Germany’s role within the global economy
(referring to both the constellation of actors as well as its industrial profi le) the following
section will develop the two scenarios announced in the introduction. In both scenarios,
perspective focuses on the period until year 2020, with the aim of briefl y outlining the
two most probable directions the global economy is likely to take over the next 15 years.
Thereafter, a draft for respective options in German foreign trade policy is developed.
III. TWO SCENARIOS EXTENDING TO THE YEAR 2020: TRIGGERS, COSTS,
AND RISKS
The future development of the global economy depends on a variety of factors, which
are diffi cult to assess. The following scenarios do not take into account major changes,
including, i.e., natural disasters, cross-regional wars, crises in political systems of important
nations like China, technological revolutions like highly effi cient solar energy
technology, or any other massive shocks, such as acts of terrorism. Some hard-to-assess
factors, however, will be addressed below. The two scenarios presented here describe
only two rough development trends, in which the decisive factor is the occurrence (or
non-occurrence) of a collapse of the US Dollar.
– The continuation of previous trends – unless their discontinuation is foreseeable
– serves as the reference scenario.
– The second scenario projects a world economic crisis, driving the zero-sum aspects
in the global economy and urging all countries to adopt more egoistic policies, which
contribute little towards overcoming the crisis.
59

We will do without a third scenario, optimal from a German point of view (realization
of the Lisbon goals of the EU with a strongly growing, fully employed Germany and
Europe and concurrent `normal´ development in the remaining regions), as there are
few indications for it at this time.
60
III.1 Reference Scenario: Continuity of Unequal Growth
This scenario presumes that basic growth trends in the most important world regions,
i.e. countries, will not change dramatically (in other words, except for minor fl uctuations
in the economic cycle). This means:
– China and India continue to grow at 7 to 10 percent annually, since they are still far
from the productivity frontier. Domestic growth orientation also continues to rise,
partially due to a tendency towards currency revaluation, which will lower the trade
surplus despite rising exports.
– The US grows at a slower pace than previously to reduce its trade and budget defi cits,
without the dollar’s collapsing, albeit slightly losing in value. Higher infl ation rates
provide real relief to some of the indebted sectors of the US economy (government,
households), but growth is reduced, in part because of higher interest rates (due to an
anti-infl ationary policy of the US Federal Reserve Bank).
– Latin America and the remainder of Asia and Africa continue to grow at the same
rate, around 2 to 7 percent, due to these regions’ inability to create the social and
political conditions needed for rapid growth.
– The EU experiences only marginal adjustments but no massive crises (no withdrawal
from the Euro zone), at a growth rate of 2 to 3 percent. The Euro is revaluated slightly
upward, keeping infl ation low, so that the ECB does not have to drastically raise the
interest rate. This will facilitate the adjustment process of debt-driven boom countries
(Spain, UK), and permit a stronger growth in the core member states.
The commodities market continues to be characterized by strong demand, which
causes slow, yet real price increases. This, however, will lead to shifts in consumption
and access to new supply sources. Demand on the part of commodity-exporting countries
will increase. Energy prices remain high but no longer rise dramatically, since refi nery
capacity and marginal suppliers (e.g., of oil shale and bio fuels) will increase.
The markets for manufactured products remain under pressure from Chinese exports,
although the price pressure somewhat decreases. At the same time, China’s purchasing
power and demand – as that of other emerging markets and commodity exporters – for
investment goods and high-quality consumer goods increase, providing Germany with
additional market opportunities. Due to the continuous, global division of labor and the
additional offshoring of labor-intensive production to the Asian region, the process of the
de-industrialization of Germany is expected to continue. The pressure toward modernizing
the production structure (training system, research, and innovation) and toward
the expansion of the service sector remains. The low-skilled work force made redundant
by manufacturing industries, require job offers primarily in the domestic-marketoriented
service sector, which suit these workers’ qualifi cations. The adjustment process
is to some degree painful. Nonetheless, the rise of China, India and other poor countries
may also contribute to Germany’s prosperity – if the adjustment process is intelligently
steered and successful.

III.2 Crisis Scenario: Dollar Crash and Weak Global Demand
This scenario assumes that the adjustment processes needed to lessen the impact of
existing imbalances do not take place in form of a soft, smooth landing but instead of a
series of shocks triggering additional imbalances and reciprocally exacerbating each other
to a point of crisis, at least for some time. The trigger may – or may not – be a collapse
of the US dollar, if international investors are no longer willing to participate in fi nancing
the American twin defi cit (budget and trade) to the previous extent. Such a reverse
in investor attitude might also be the result of the partly politically, partly economically
motivated decisions by the dollar hoarders to date, China and OPEC, to get out of the
dollar. A severe collapse of the dollar would signifi cantly dampen the purchasing power
of US importers (consumers as well as corporations), and could lead to a growth collapse
in China, India, and the remaining world (including the EU, and especially in Germany).
The collapse of stock markets, together with devaluations, additionally frighten international
fi nancial investors, who in the last few years had unrealistically high profi t expectations,
potentially triggering debt crises.
Globally weaker growth should relax the situation on the commodity markets. However,
lower volumes and prices lead to a decreased purchasing power on the part of commodity
exporters. The increasing competition for shrinking markets may lead to a battle
for raw materials, as access to the cheapest sources takes on even more importance. At
the same time, vehement export campaigns increase (due to lower domestic demand),
supported by mercantilism and protectionism (competitive devaluation or disinfl ation).
Trade policy confl icts reinforce the tendencies towards regionalization because, thanks
to hegemonic powers, the regions still harbor the hope of being able to control overly
damaging beggar-my-neighbor policies.
Costs and risks, especially in the crisis scenario, but also to some degree in the reference
scenario, lie in unemployment remaining high and prosperity having to be partially
sacrifi ced on the altar of competitiveness, potentially forcing Germany to participate in
military action to secure raw materials, or at least believe that it must make foreign policy
concessions to suppliers, such as Russia. The regionalization of the global economy could
intensify, even though an appreciation of the Euro may pull more imports in the Euro
zone, which would not compensate, however, for the loss in U.S. consumption due to a
devalued dollar, and thus not prevent the global collapse of growth.
In Germany and in Europe a potentially strong infl ux of dollars would initially lead
to the Euro’s appreciation and rising prices of European/German assets (stocks, real
estate, etc.). This asset price infl ation does not necessarily mean infl ation in goods markets,
since cheaper imports would have a dampening effect. On one hand, the heavy
infl ux of foreign capital might lead to a repeat performance of the `Locust´ debate, and,
on the other hand, bring about another wave of economic nationalism (fear of foreign
takeovers). Rising asset values, however, would also strengthen consumer spending by
providing an illusion of prosperity. The ECB would have to decide if it should put a halt
to this asset infl ation or, in view of low consumer price infl ation, tolerate it. Attempts to
arrest it by means of raised interest rates would have the fatal side effect of attracting
additional capital.
In both the crisis – and the reference scenario, there are political options to, minimize
costs and risks, and make use of opportunities. During a crisis, the most likely policies
to fi nd supporters are protectionist policies along the line of `everybody for himself´,
which generally escalate a crisis situation. In this case it would be necessary to
61

counterbalance the emergence of the crisis scenario while still in the reference scenario,
something rather diffi cult, given the existing hegemonic power structures with dominant
free-market oriented actors.
62
IV. German Foreign Economic Policy Options
Germany’s future prosperity depends on certain regulatory structures of the international
economy remaining intact or developing in such a manner as to counterbalance
currently existing imbalances, while primarily serving German interests. These interests,
however, are not without contradictions – between consumers and producers, between
capital and labor, etc. The relevant regulatory elements extend from the immediate
surroundings of the European region and the EU, over its neighboring regions and the
OECD countries, to the global economy.
German foreign trade policy has several channels of infl uence available for articulating
its interests in trade -and fi nance matters (EU, G fora, international organizations).
Especially in the reference scenario, there are a number of options for working against a
continuation of the current development trends through a gradual evening-out of the large
trade imbalances. This would require the establishment of a new, global, politico-economic
consensus, which deviates from the basic alignment to a neo-liberal globalization and returns
to the strategy of more closely embedding economic activities in a political body of
rules and regulation. Germany’s actual opportunities for exerting infl uence in this respect,
as an individual actor, are limited. Its chances increase through a transfer of authority to
the EU level. The veto rights of the US in the Bretton Woods Institutions – something that
has prevented many reforms during the last decade and caused multilateralism to suffer
a legitimacy crisis, counteract this, however. The formation of a new regime for politically
structuring globalization and creating sustainable global trade regulation is therefore only
feasible as a result of power shifts in the wake of the crisis scenario.
IV.1 Europeanization and Multilateral Regimes
The institution of Europe plays a dual role in the policy options: a) First, Europe offers
the opportunity for creating a stable, regional economic block through the comprehensive
coordination of individual economies, while relatively shielding the same from
global economic shocks. b) Secondly, the bundling of individual European voices in the
existing multilateral fora can reinforce European regulatory demands.
a) Shaping the European Economy
The Euro zone is the central policy arena, where the priority must be to secure the
continuous expansion of supply and demand, together with a long-term balanced current
account, through coordinated monetary, fi scal and wage policies. The current system
demonstrates a one-sided bias towards stability, which has slowed down Germany’s
growth in recent years. On the reverse side, there is the threat of a collapse in demand
from other Euro-zone members like Italy or Spain, should their economies enter a recession
as a reaction to their – compared to Germany – higher unit labor costs. The EU needs
a competition policy, which controls the race for real subsidies to business by continuously
lowering taxation and subsidized wages. Germany should insist on reviving and

promoting the macro-economic dialog. In light of the reference scenario, stronger growth
in Europe would reduce the role of the US as the `global consumer of last resort´.
In addition, Germany (like all core EU member states) must be interested in a rapid
growth - and modernization process in the neighboring regions. This demands some
painful adjustments in Germany as well, but at the same time offers the best conditions
for political and social stability, as well as growing sales opportunities for German exports.
The catching-up process of the neighboring countries fi rstly requires a real development
process, accompanied by the necessary investments and increase in productivity.
To support it, Germany, and the EU, should not insist on their traditionally free-market,
regulatory concepts, but tolerate promising, heterodox policies, such as those adopted
by the Asian Tiger economies or China. Secondly, a nominal catching-up process in
prices and income is needed, partially executed through the appreciation of currencies,
and partially through slightly higher infl ation. Both processes require a delicate balance,
since excessively rapid, nominal catching-up processes reduce competitiveness, and excessively
slow catching-up processes may give away the profi ts of economic prosperity
and restrict the purchasing power of the neighboring countries – this also to Germany’s
disadvantage. The economic policies of the EU could contribute to stabilizing the balance
by not punishing real appreciations through an exclusion from the Euro zone, and by
providing monetary guarantees, rendering the accumulation of large, demand-reducing
currency reserves to protect against fi nancial crises, unnecessary.
b) Strengthening the European Voice in Global Economic Governance
The development of a common European political position and the presentation of the
EU as a single actor in multilateral fora represent the fundamental pillars of Germany’s
future foreign economic policy, both in the reference – and the crisis scenario. The starting
point, however, is not that of homogenous (regulatory) interests among the EU member
states, but of confl icts of vested interests within and between the individual member states.
A (German) regulatory policy, therefore, must primarily be aimed at strengthening heterodox
social forces in the member states. In the end, Germany’s unilateral options for exerting
infl uence on the structure of the global economy in general, and the fi nancial markets
in particular, are mostly indirect. Options for a direct infl uence are the immediate restructuring
of its own economic and industrial structure as well as its fi scal activities. If the crisis
scenario occurred, a massive intervention by the European Central Bank (together with
other major central banks, including China’s) would be required.
Whatever competencies have already been transferred to the European level, in terms
of economic issues, should also be established in the fi nancial sector. Germany’s foreign
trade policies should be completely Europeanized, since the infl uence of individual
nations in international organizations and fora of international economic and fi nancial
relations is being increasingly marginalized – not the least due to the legitimacy crisis of
the organizations themselves. Theoretically, an active approach to Germany’s role in the
global economy consists of the cooperative collaboration in multilateral fora, with special
emphasis on the inclusion of systemically relevant emerging countries, plus a coordination
of positions between EU member states, especially of the Euro nations. Only by reestablishing
the legitimacy of a binding multilateral framework together with rule-based
institutions and organizations, will it be politically possible to even out systemic imbalances
in a regulatory manner and preemptively counteract their development. Democratizing
global governance in the sense of a balanced participation by all nations in the
63

international organizations (e.g. according to their gross national product in purchasing
power parities), an increase in transparency and accountability of the organizations, as
well as a stronger participation of non-profi t organizations, are the prerequisites for such
an approach.
The largest obstacle in the creation of a sustainable global trade regime is the institutionalized
veto status of the US government. Any successful global regulatory initiative
by Germany or the EU would therefore most likely ensue as a consequence of our crisis
scenario (a US default as crucial window of opportunity, resulting in a fundamental shift
in the balance of power between foreign – and domestic actors). Broad coalitions between
political and non-profi t organizations, which might try to advance a reform model against
the interests of the US, have been – and will continue to be – rather unsuccessful. In the reference
scenario, only smaller `learning steps´ are realistic, which may not extend beyond
the issues relatively neutral to special interests, such as an increase in transparency.
64
IV.2 Regulating Global Financial Markets
The programmatic target of Germany’s and the EU’s multilateralism must be the articulation
and anchoring of a consensus on regulating global fi nancial markets. Such a
consensus would in general provide more room for macroeconomic steering and attempt
to institutionally counteract the buildup of systemic risks, such as major exchange rate
fl uctuations and trade imbalances (surplus and defi cits). Such a globally coordinating
approach would require strong, democratically legitimized international organizations
and regulations. The central (economic-) diplomatic starting point in forming such coalitions
would be convincing large, emerging market countries in such fora as the G20 of
the necessity of this approach. In recent past, it was these countries – albeit potentially
the benefi ciaries of a stabilizing global governance – that have been weary of integrating
and coordinating their economic relations and activities to date, for fear of rising credit
costs or restrictions in accessing (capital) markets. Due to this resistance over the last ten
years, many valuable reform projects initiated and supported by the German government
could not be realized.
A policy of an active global governance has to involve (capital) market actors in such
a way that their (systemically rooted) pro-cyclical and – on an aggregate level – potentially
crisis-prone behavior is counterbalanced by a convincing, sophisticated regulatory
approach. Otherwise the international community would be forced to provide a public
safety net for market failures, and bear a majority of the costs, thereby accelerating the
inclination of investors to take dangerous risks (moral hazards). A general increase in
transparency already constitutes a major step in the right direction. In addition, involving
the private sector in crisis solutions and a fair burden-sharing between creditors and
debtors is necessary – comparable to national insolvency procedures. The establishment
of an international insolvency (or debt restructuring) mechanism for sovereign creditors
would be an important contribution to the stabilization of the global fi nancial architecture.
A better surveillance of hedge funds, plus a greater acceptance of capital controls
(in developing and emerging economies) would be equally useful measures to be taken.
In case of a massive fl ight out of the US dollar, as outlined in our crisis scenario, all
three measures – a debt restructuring mechanism, comprehensive surveillance of market
actors, and use of capital controls – would represent essential mechanisms in crisis
intervention. If these measures were implemented in a consistent, timely manner, they

would also function preventively. Such measures in global monetary policy would have a
sustained effect on the reduction of currency hoarding, such as in China and Japan, and
promote a more productive management of reserves (e.g. using them to import capital
goods from industrial nations).
IV.3 Sustainable Global Trade Regime
Closely related to the reference scenario is the question of a sustainable world trade
regime with social standards and basic labor rights. Offensive beggar-my-neighbor policies
induce global trade imbalances potentially leading to the above-mentioned crisis
scenario. Any counteraction requires a more sophisticated and sequenced liberalization,
symmetrically aligned and linked to minimum social standards. In the short-term perspective,
it makes sense to revive the Doha Round, although pressure on developing
countries to liberalize markets should not be too high. For years has world trade politics
been fi xated on the reduction or removal of trade barriers (duties, quotas, etc.) This removal,
however, is primarily in the short-term interest of exporters and consumers in
import nations. With fl exible exchange rates, revaluation compensates for consistently
high duties anyway, negating the price advantage of protected domestic production.
As in the European region, it is also true on a global scale that rich nations must be
interested in a long-term increase of the purchasing power in import nations, which, in the
end, also depends on these nations’ export opportunities. If poor countries develop faster
under a more protectionist regime than under conditions of a “big-bang” liberalization, the
latter should not be enforced without specifi c need. This assumption is supported by the
success in Asia as well as the positive record of the pre-globalization period (19451975). By
opening their markets, rich and fl exible economies contribute more to global growth than
poor and encrusted economies. Instead, the asymmetric status quo forces such countries
into niches related to their few, already existing comparative advantages (often ”rent-seeking
economies”). In this sense, a more pronounced long-term perspective should have priority
in future trade rounds. At the same time and in the same context, pressure within the
EU to reform its own agricultural policies should be increased.
The liberalization of trade and investments should continue to be negotiated under
the umbrella of the WTO, and should be included in a stable, multilateral, regulatory
system of non-discrimination. This applies particularly to the commodity markets, and to
oil and natural gas especially. Germany should therefore counteract any efforts to further
cartelize these markets and simultaneously develop and promote alternative sources of
energy. As long as the market mechanism (instead of a political-military) functions in
regard to global energy provision, supplying Germany and Europe, rich and strong in
exports as they are, should not present a major problem.
In addition, the various fora should be expanded to include the civil society. The binding
establishment of global, minimum social protection must be a central legal component
of world trade. As described in our scenarios, aside from the protection of workers,
social standards also contribute to economic development (as investment incentives), are
instrumental in reducing the asymmetries in global development, and help avoid major
imbalances caused by different development strategies.
The capitalist world economy is a mighty force in the creation of prosperity, but it has
inherent weaknesses and dangerous tendencies, potentially leading to self-destruction
(see crisis scenario above) in the absence of political and social control mechanisms. The
65

three major blind spots concern the protection of workers, the environment, and the
consumers. Neglect or exploitation in these three areas can yield short-term advantages
in form of increased productivity, higher growth rates, and higher profi ts, in other words,
stronger `competitiveness´ currently so highly valued. Any counteracting measures to
protect the environment or labor forces are seen as placing a burden on enterprises by
limiting their options in off-loading their costs to society (externalization). To avoid the
neglect of long-term growth opportunities and protect the interests of employees, consumers,
and those dependent on a sustainable environment, global races to the bottom
should be halted. Germany’s role in the global economy in 2020 should be a progressive
European, committed to embed market processes, and setting standards for social -and
environmental protection. Such standards would be much more easily implemented in
the reference scenario, when wealth generally increases, than in the crisis scenario, when
zero-sum thinking subordinates all goals to the dictate of a misunderstood competitiveness.
There is an asymmetric chance for reforms in global economic policy: While regulation
of the capital markets is more likely to occur in times of crisis, the chances for trade
and production standards are actually higher in the reference scenario.
On the authors: Michael Dauderstädt is the director of the Division for Economic and Social Policy at the
Friedrich-Ebert-Stiftung. Christian Kellermann is a research fellow in the International Policy Analysis Unit
at the Friedrich-Ebert-Stiftung.
66

WORLD ECONOMIC CRISIS AND THE WELFARE
STATE
Klaus Busch
This article authored by Klaus Busch was originally published by Friedrich-Ebert-
Stiftung, Internat. Policy Analysis, Berlin, 2010
INTRODUCTION
By autumn 2009, the worst seemed to be over: in many countries, the recession had
bottomed out, some people were already talking of a V-shaped crisis and world stock
markets were experiencing a strong recovery. In contrast to the last great global economic
crisis, in 1929, this time the crisis seemed to be of only short duration and a speedy return
to the status quo ante was possible.
This article does not share this optimistic view. Instead, it seeks to substantiate the
thesis that fundamental economic and social imbalances in the world economy are the
causes of this crisis. These imbalances can be put right only if current account differentials
between the United States, on the one hand, and China, Japan and Germany on the
other are reduced; world fi nancial markets are re-regulated; a new global monetary order
is established; distortions of competition are reduced in the Eurozone; income and asset
distribution in many countries of the world is recalibrated; and growth models become
more domestically oriented, above all in China, Japan and Germany, but also in Central
and Eastern Europe and in many developing countries. Only in this way can the negative
effects on social security systems, which have been under-mined by increased unemployment
and rampant public debt, be sustainably avoided. All of this is possible only if
the neoliberal deregulatory state is transformed into a strong and globally cooperating
interventional state.
The text is divided into three parts. In the fi rst part, ten arguments are presented
which suggest that, if things remain as they are, the world economy will not revert to the
high growth rates of the precrisis era after the crisis has been overcome, but rather undergo
a period of signifi cantly weaker growth. The second part focuses on the conse-quences
of the crisis for the welfare state or social security systems in Europe and in the developing
countries. First, the substantial changes experienced by welfare states since the mid-
1990s are addressed, in order, against this background, to discuss the effects of the world
economic crisis on social security systems. This is followed by a presen-tation of the
various social security systems in the developing countries, which are mainly informal in
nature and, in low income countries, partly consist of cash transfer systems, taking on
the form of public social protection systems only in some middle income countries. The
crisis will only further intensify these differences among the developing countries. Part
three analyses the many steps which must be taken on the way towards a balanced, more
crisis-resistant growth of the world economy and to the preservation and expansion of
social security systems. The necessary reforms in relation to the international, European
and German levels will be presented in separate subsections.
67

68
1 AFTER THE WORLD ECONOMIC CRISIS: TEN REASONS FOR WEAKER
GROWTH IN THE WORLD ECONOMY
Currently, the main topic of discussion with regard to the world economy is how
quickly the crisis will be overcome and what course the recovery will take. Many observers
expect a rapid V-form recovery, others a somewhat more leisurely U-form one.
A third group consider it probable that, after a fi rst brief recovery, there will be another
downturn before the crisis is fi nally over, yielding, therefore, a W-form pattern. Yet others,
fi nally, see a danger that, after this crisis, there will be a longer period of stagnation,
similar to the global economic crisis after 1929, forming an L-shaped pattern. In what
follows I shall give ten reasons which speak in favour of a more cautious consideration of
the chances of rapid recovery for the world economy.
(i) Problems of the US Economy
The growth model of the US economy in the period after the dot-com crash in
2000/2001 was in no small measure responsible for the current global economic crisis.
After the bursting of the share bubble, the policy of cheap money under Alan Greenspan,
chairman of the Federal Reserve, together with the extreme deregulation of fi nancial
markets, was the starting point for the development of the crisis on the US real estate
market due to overspeculation (Krugman 2008: 170ff). Generally speaking, an expansive
monetary policy, together with an expansive fi scal policy led to high growth rates in the
United States. Against this background, the United States, given its enormous weight
in the world economy (20 per cent of global GDP in 2008), was the decisive motor of
growth in the period before the crisis. The United States lived far beyond its means during
this time: internal absorption consisting of private and public consumption, as well
as investments was much higher than domestic production of goods and services, so that
imports far exceeded exports. The world (China, Japan, Germany and the OPEC countries)
invested their savings in the United States, bought US government bonds, shares
and other securities. Up until the crash, this exchange formed the basis of the boom in
the world economy and everything seemed fi ne. China, Japan, the OPEC countries and
Germany fed the United States with their goods and services, thereby recording high
export surpluses, and gave the US, in the form of savings exports, the credit it needed to
fi nance private and public excesses. Growth here created growth there, fi nanced on the
never-never, and drove the world economy to ever higher levels.
In the meantime, we know the end of the story and now we need to go into reverse.
Heavily in-debted US consumers have to reduce their debts – in the form of credit card
debts, car loan debts and mortgage debts – that is, they have to save. The US state, after
its stimulus packages for the economy and the fi nancial sector, also has to begin to reduce
its debts (in other words, to save). It is therefore clear that two important engines of
growth for the United States and the world economy will be underpowered for the foreseeable
future. It is also clear that the United States will no longer function as a stomach
which is able to swallow an oversized portion of the exports of the rest of the world.
(ii) Reduction of Global Economic Imbalances
As already mentioned, very large imbalances have developed in the world economy
over the past 15 years. The United States has registered ever larger current account defi -

cits, while China, Germany, Japan and the OPEC countries, by contrast, have recorded
ever greater current account surpluses. This was possible only because, on the one hand,
the rest of the world had faith in the United States as a debtor and was ready to invest
ever larger capital sums there, while, on the other hand, many states, above all China,
prevented their currency from appreciating by intervening in foreign exchange markets.
In 2008, Chinese currency reserves amounted to 2.1 trillion US dollars (almost one-third
of the world’s currency reserves), a large proportion of these funds being pumped into
the US by China buying securities (Bofi nger 2009: 72ff). It should be mentioned in passing
that the overspeculation on world fi nancial markets can also be traced back to these
huge international capital fl ows (Münchau 2008: 155ff).
It should be clear that such imbalances cannot go on forever. Debts (US) must be
repaid some time; the currency of indebted nations (dollar) can come under strong pressure
in foreign exchange markets; and benefi ts gained from an undervalued currency
(China) will sooner or later provoke counterreactions (competitive devaluations, protection-ism).
In the immediate future, the US must reduce its defi cits, a process which has
already begun due to the recession there, but must also be sustained. At the same time,
the countries running surpluses must reduce their export dependency through stronger
domestic growth, thereby relieving the strain on the USA. Furthermore, a re-orientation
of currencies is also required, with further devaluation of the dollar, as well as the yen
and the euro, but above all with a revaluation of the Chinese currency.
These necessary currency adjustments will slow the pace of globalisation, promote
growth in the USA, subdue growth in China, Japan and the Euro-zone, but also confer
more stability on the world economy and the global fi nancial system.
(iii) Rising Unemployment and the Strain on Consumption
Since the beginning of the recession in December 2007, seven million jobs have been
lost in the USA, more than in any other recession since the Second World War. The unemployment
rate had risen to 10.2 per cent in October 2009, the highest since 1983, and
for the whole of 2010 a rate of more than 10 per cent is expected (IMF 2009: 65). Unemployment
puts a strain on private consumption, which in the USA accounts for around
70 per cent of GDP.
There are also negative expectations in Japan with regard to domestic demand as a
result of rising unemployment. For the Eurozone, the IMF expects an unemployment rate
of 11.5 per cent for 2010 (IMF 2009: 65). The general assumption with regard to the industrialised
countries is that unemployment rates will peak in 2010, before gradually falling
back over the next few years. This means that private consumption will rather hold back
economic recovery than support it after the crisis (Roubini 2009a).
(iv) Budget Policy and the Reduction of Public Debt
In order to avoid the collapse of the fi nancial sector, governments in the USA, Japan
and the EU have invested billions in rescue plans, and in many parts of the world economic
stimulus programmes have been adopted to combat severe recession, although
they differ considerably in size – not to mention economic policy uncertainties.
These inevitable interventions have left gaping holes in state budgets. Many states,
in particular in the EU, on the basis of the strong economic up-swing since 2004, were
69

on the point of reducing state indebtedness, but were forced into an abrupt policy aboutturn
by the crisis. The IMF assumes that the net debt ratio from 2007 to 2014 in the USA
will almost double, rising from 43 to 83 per cent. For the Eurozone, the IMF expects, for
the same period, an increase from 52 to 75 per cent, and for Germany from 57 to 83 per
cent. Japan’s net debt ratio is to increase from 80 to 136 per cent and the UK’s from 38 to
83 per cent. Net new debt in the USA is estimated at 9.7 per cent for 2010, at 6.1 per cent
for Germany and the Eurozone, 10.9 per cent for the UK and 9.8 per cent for Japan (IMF
2009: 203, Table A8). Regardless of the controversial issue of how quickly and to what
extent governments will switch from an expansive fi scal policy to a cost-cutting policy,
there is general agreement that the consolidation of state budgets must be tackled after
the crisis has come to an end. As far as economic growth is concerned, this undoubtedly
means that, during this period, the state will seek to keep a tight rein, whether by means
of tax and contribution increases or spending cuts.
70
(v) Monetary Policy Problems
Central banks have lowered base rates in order to combat the economic crisis and have
provided the banking system with more liquidity by diverse means. Critics of this monetary
policy fear that the increased money supply may lead to higher infl ation, in particular
if the central banks, as the economy picks up, commence their exit strategies too late.
With regard to potential problems for economic growth which might arise from future
monetary policy after the end of the crisis, two issues are relevant. On the one hand,
it is being discussed whether in future central banks should not concentrate only on
fi ghting infl ation, but should also be encouraged to terminate bubbles in fi nancial markets
in good time. If this happens, it can infl uence economic growth if central banks perform
this task very restrictively and intervene rapidly with regard to emerging excesses
in stock and real estate markets.
Another problem can arise if the central banks commence their exit strategies too
late and, to begin with, tolerate higher infl ation rates which they later try to get a grip of
by means of a tough monetary policy. Akerlof and Shiller rightly point out that money is
not neutral and money illusion really exists (Akerlof and Shiller 2009: 157ff). They argue
that workers, when infl ation is falling, fi nd even nominal wage reductions which are
neutral in real terms to be unfair, if they suffer from money illusion. Therefore, it must be
assumed that there will be a trade-off between infl ation and unemployment, even in the
long term. A tough anti-infl ation policy which over a longer period costs growth and jobs
is therefore a bad economic policy.
On the whole, as result of the crisis, monetary policy has not been made any easier. The
possible extension of its tasks to the combating of fi nancial market bubbles could impose
diffi cult decisions on it, which might have the effect of dampening growth and employment.
Similarly, the exit strategy might lead at fi rst to more infl ation and then to substantially
lower growth, if the so-called »animal spirits« are not taken into consideration.
(vi) Wage Policy and Distortions of Competition in the Eurozone
At the beginning of the 1980s, a new phase commenced with regard to wage policy
in European countries, which has continued until today. As a result of far-reaching socioeconomic
changes, since that time the trade unions have not been able to ensure that,

on average, real wages keep pace with labour productivity (cf. Baum-Ceisig, Busch and
Nospickel 2007: 218ff).
For the European integration process it is particularly problematic that this process
of declining real unit wage costs has taken place very unevenly, as a result of
which distortions of competition have arisen, especially in the Eurozone. While
countries with their own currencies can balance longer lasting imbalances in unit
wage cost development by means of exchange rate adjustments (re- and de-valuations),
this is by definition no longer possible in a common currency area. In the
Eurozone, as a result of the above-average fall in real unit wage costs in Germany in
recent years, tensions have been heightened. Germany has been able to con-solidate
its leading export position in the Eurozone on the basis of distortions of competition
arising from wage policy. As a result, it has put its main competitor, France,
but also Greece, Italy, Portugal and Spain under significant pressure (Fritsche 2009).
These imbalances have exposed the stability of the Eurozone to considerable strain. If
EMU’s internal stability is to be safeguarded, wage policy must urgently be adjusted
to national figures on produc-tivity and inflation.
Like the reduction of global current account imbalances (see point ii above), this
correction in wage policy in the Eurozone would also force Germany to bid farewell to
its excessively export-oriented growth model and direct its efforts towards the domestic
economy. In the transition period between these two growth models economic growth in
Germany would slow down.
(vii) The Crisis in Central and Eastern Europe
The less developed states in Central and Eastern Europe which have acceded to
the EU (CEE-10) have experienced a strong economic upturn since overcoming their
transformation crises and have been able to reduce the development gap with the EU-
15 considerably. The catch-up process, in textbook fashion, has been co-fi nanced by
high capital imports, resulting from large current account defi cits in the CEE-10. This
catch-up model, supported by a high foreign debt, remains feasible as long as foreign
creditors have confi dence in the economic development of the emerging countries.
The experience of many Asian countries in the 1990s and of many Latin American
countries in the 1980s, however, shows that this model is extremely fragile. If current
account defi cits reach high levels in relation to GDP, internal public debt, which is usually
linked to foreign debt, grows to an extraordinary size and these double defi cits, in
combination with domestic political turbulence or exogenous economic shocks, can
lead to a currency crisis. A proportion of foreign capital fl ows out of these countries,
new foreign capital is hard to obtain and even some domestic capital fl ows abroad,
thereby intensifying the currency crisis. This is exactly the situation in many CEE-10
countries as a result of the global fi nancial market crisis. On top of this, the economic
downturn in the EU-15 has further weakened the strongly export-oriented economies
among the CEE-10 and increased their current account defi cits. Overall, the question
arises of whether, in light of these experiences, the economic model of the CEE-10 is
not too foreign-, that is, especially EU-oriented. A stronger domestic market orientation
and a lower dependence on capital imports may lead to lower growth rates, but
the catch-up process would acquire a lot more stability. The particular severity of the
crisis in some CEE-10 countries has negative consequences for the exports of EU-15
71

countries, especially Germany. Any eventual restructuring of these countries’ growth
models would have a depressive effect on economic growth in Germany.
72
(viii) Uncertainty on the World Oil Market
In 2008, the OPEC countries exported oil to the value of more than 1 trillion dollars.
This was an increase of 35 per cent on 2007, attributable primarily to the strong increase
in the oil price to 147 dollars a barrel. As a result of the global recession, the oil price then
plunged to a mere 30 dollars a barrel in February 2009, recovering somewhat to reach 70
dollars a barrel by September 2009.
The further development of the world economy will depend strongly on the evolution
of the oil price. The prognosis is uncertain, but world oil reserves are fast running out.
At the same time, demand is rising, due to economic catch-up in the emerging countries
(above all, China and India). The estimated reduction in investment in development and
production in 2009 of between 15 and 20 per cent – according to the International Energy
Agency (IEA) – is counterproductive.
At present, further developments in the world oil market are diffi cult to assess. It is
unclear whether stricter regulation of futures markets can be effected on an international
basis. The development of reserves, production and demand is also diffi cult to predict.
However, it must be assumed that the world oil price is on an upward trend, and will act
as a brake on the world economy.
(ix) The Signifi cance of the Credit Crunch
A credit crunch occurs when investors cannot obtain loans – or only under onerous
conditions – to fi nance their projects. Whether the current crisis involves a credit
crunch in the true sense is controversial. The current willingness of the banks to lend
is hampered by, basically, three factors. First, toxic securities continue to lie dormant in
banks’ balance sheets, leading to an increased need for writedowns and so narrowing
the banks’ capital base. Second, as a result of the crisis, more and more enterprises will
become distressed and no longer be able to repay their loans. This too will increase the
banks’ need for writedowns. Finally, the international Basel II Treaty requires that banks
set aside more equity capital to cover problematic loans, thereby reducing the banks’
basis for loan allocation.
The upturn of the world economy could be adversely affected if the banks still have
large writedowns in store and more and more borrowers lose creditworthiness due to the
crisis. In any case, governments in principle have suffi cient means at their disposal to
avoid a credit crunch.
(x) The Inadequate Re-regulation of World Financial Markets
After the collapse of Lehman Brothers in September 2008, the world fi nancial crisis
peaked. During this period, when people were in shock in the face of the unthinkable,
calls for the re-regulation of fi nancial markets were ubiquitous. Many sensible proposals
were made (cf. Bofi nger 2009; Krugman 2008; Otte 2009; Münchau 2008; Schäfer 2009),
although the various institutions and authors focused on different things. The most important
demands included:

– destruction of the shadow banking system in order to subject the entire banking system
to state control;
– introduction of counter-cyclical rules in the Basel II Treaty;
– abolition of mark-to-market accounting;
– takeover of credit rating agencies by the state;
– control of hedge funds;
– regulation of private equity investments;
– controls and transparency with regard to all fi nancial products;
– a ban on particularly risky collateralised debt obligations (CDOs);
– introduction of a state-controlled exchange for credit default swaps (CDSs);
– limitation and control of bonus payments in the fi nancial sector;
– an end to all tax havens, including in the industrialised countries;
– lifting of bank secrecy in all countries;
– introduction of a global supervisory authority for world fi nancial markets.
The G-20 has addressed this topic several times and adopted principles for a new set
of regulations for international fi nancial markets at its Pittsburgh summit at the end of
September 2009. It is foreseen that, by the end of 2010, new rules will be developed at international
level for the increase and improvement of banks’ equity capital, which would then
be introduced gradually by the end of 2012. The banks are to hold more and higher quality
equity capital, while there will be stricter rules for collateralised debt obligations (CDOs).
All the G-20 countries – in other words, including the USA – want to implement the stricter
Basel II equity capital rules by 2011. For derivatives, exchanges or electronic trading platforms
are to be introduced by the end of 2012; by mid-2011, uniform accounting standards
will be developed. Major banks of systemic importance must develop strategies to cover the
event of their bankruptcy (»wills«). Tax havens are to be actively combated. Management
bonus systems are to be more strictly regulated and restricted.
These resolutions sound promising, but are diffi cult to assess since everything depends
on the fi nal proposals and resolutions which, with regard to the most important
issues, are due only in 2011 and 2012. Some scepticism is warranted because, in the wake
of the partial recovery of world fi nancial markets and the world economy in the summer
of 2009, the zeal for reform has waned somewhat (Hoffmann 2009; Wolf 2009). In particular
with regard to the dismantling of the shadow banking system, the control of rating
agencies, hedge funds and private equity companies, the restriction of CDOs and the
supervision of CDS markets, strong resistance is to be expected. An international supervisory
authority with real competences will, in all probability, not materialise. Ultimately,
a great deal will remain within the jurisdiction of nation-states.
It is therefore apparent that the danger of a repetition of the international fi nancial
crisis will not be averted.
Provisional Conclusions
The arguments presented here should serve as a warning that a rapid V-shaped recovery
of the world economy or a speedy return to the high growth rates of the pre-crisis era
are not to be expected. Instead, all indications are that the world economy will recover
slowly and growth will be weak in the post-crisis period. This sceptical view of things is
shared by many critics, such as Krugman (2009), Rodrik (2009), Rogoff (2009), Roubini
(2009b), Shiller (2009) and Stiglitz (2009), to mention only some of the most important.
73

Although the analyses differ in detail, there is general agreement that without the elimination
of the global imbalances between the USA, on the one hand, and China, Japan
and Germany on the other; without a correction of the unequal distribution of wealth
and incomes, both nationally and internationally; without a new architecture for world
fi nancial markets; and without strong state intervention at the level of nation-states and
the world economy, a transition to stable and balanced growth across the world will
scarcely be possible.
Some of the reform measures already touched on in this section, and to be presented
in more detail in section 3, entail lower growth in individual countries; for example, the
coordination of European wage policy in Germany. Overall, however, the implementation
of international, European and national reform packages would eliminate global
economic and social imbalances and lead to balanced and more crisis-resistant growth
for the world economy, as well as for Europe and individual nation-states.
2 ECONOMIC STAGNATION AND SOCIAL SE-CURITY SYSTEMS IN EUROPE AND
THE DEVELOPING COUNTRIES
Weaker economic growth will also adversely affect social security systems in the various
regions of the world. In many industrialised countries, the welfare state has come under
pressure since the 1990s as a result of demographic change, high public debt and low
employment rates, triggering a host of reforms. While the economic boom of 2004–2008
provided some relief, now the steep increase in public debt, higher unemployment and
prospective lower growth rates means that a new set of burdens lies in store. In many
developing countries, the process of building extensive social security systems is far from
complete. Particularly in developing countries, which have been adversely affected by the
fall in commodity prices, these reform processes have been stymied and traditional systems
of social protection (the family and the local community) have come under greater
strain due to increasing poverty. Things are otherwise in emerging countries which have
large domestic markets and are likely to grow at a high rate, despite the weakness of the
world economy. Here the economic foundations for the establishment and expansion of
social security systems will continue to improve.
In what follows, the various problems of individual groups of countries will be examined
in more detail.
74
2.1 Welfare States in the EU-27
In the European welfare states reform pressure arose over the past two decades from
a combination of explanatory variables, including demographic change, employment
crises, public debt and the system of »market states«. The evolution of social security
benefi ts since the mid-1990s illustrates that in many EU countries (Denmark, Estonia,
Finland, Ireland, Latvia, Lithuania, the Netherlands, Slovakia, Spain, Sweden and the
UK) the dismantling of the welfare state is already discernible in macrodata. The main
driver of these trends is the reforms of pension and health care systems, which account
for 70 to 80 per cent of all welfare state expenditure.
Finally, as a result of the unequal development of economic and social catchup processes,
social dumping may well emerge in the system of market states. While in Greece,

Hungary and Portugal the economic catchup process has gone hand in hand with both
an absolute and a relative expansion of the welfare state, in Estonia, Ireland, Latvia,
Lithuania, Slovakia and Spain the welfare state has been cut back in relative terms, despite
economic advance.
This shows that, without political intervention, the close link between economic
and social progress, which existed in the EU until the mid-1990s, cannot be maintained.
Belief in almost automatic interaction in the functionalist sense is not borne
out by experience.
Reforms of social security systems in the past two decades display a high degree of
convergence. Similarities with regard to reform policy and system evolution are particularly
marked in pension and labour market policy, in both Western and Eastern Europe.
Change in these sectors has tended to be radical, with existing structures often being cast
by the wayside (cf. Baum-Ceisig, Busch, Hacker and Nospickel 2008).
In pension policy, this fi nds expression in the introduction of the three-pillar model,
in the transition from defi ned benefi t schemes to defi ned contribution schemes, a relative
cutback in services (recommodifi cation) and a tendency towards mixed fi nancing
(taxes/contributions).
Such change, which has characterised all European states, is more marked in the
Central and Eastern European countries than in many of the EU-15. The stigmatisation
of socialism in the wake of the transformation from real socialism to the capitalist
market economy has meant that neoliberalism has made greater inroads in many CEE
countries than in the old EU. The »new« Europe has tended to take its bearings from
the USA and the UK – in other words, the homelands of liberalism. »Social policy« is
associated with »socialism« by many political strands in the CEE. It is not surprising,
therefore, that in the CEE – with the exception of the Czech Republic and Slovenia
– pension reforms have taken on a more pronouncedly neoliberal bent than in Western
European countries.
A similar tendency is to be noted in the development of unemployment insurance.
In both West and East Europe entitlement conditions have been tightened up, entitlement
periods cut and wage replacement ratios reduced. The social safety net allows more
people to slip through it. As in pension policy in Western and Eastern Europe, the recommodifi
cation trend here is unmistakeable. As in the pension sector, unemployment
insurance reforms are often more radical in the East than in the West.
In the health care sector, the picture so far is more differentiated. Although the reforms
are driven by the same demographic and fi nancial constraints in both East and
West, in contrast to what has happened with regard to pension and unemployment insurance,
they have taken place in a more path-dependent manner, remain more strongly
attached to existing structures and are less radical overall.
To summarise, we can say that reforms of the welfare state in the EU exhibit considerable
convergence in the East and the West. Given the common objective problems
(demographic change, public debt, unemployment) and the common socio-political
ideal-model (neoliberalism), this is not surprising. However, there are national differences
and diverging political constellations at the level of the member states, which
in the system of market states could reinforce the danger of dumping and downward
spirals (cf. Section 3.2).
75

76
2.2 Effects of the Global Economic Crisis on the Welfare States of the EU-27
The global economic crisis affects the funding of social security systems essentially
via two channels: on the one hand, due to the higher unemployment, the expenditure
of social insurance funds and the state is increasing, while on the other hand, their tax
and contribution revenues are falling as a result of lower economic growth or lower wage
increases. In this way, funding gaps generally appear in state social security systems.
Since most European states have put together larger credit-fi nanced rescue packages in
response to the economic crisis and to bale out the fi nancial sector, cumulatively larger
defi cits are emerging in state budgets and in the budgets of the social insurance funds. If
the crisis is overcome soon and the economy returns to high growth, the indebtedness of
the state as a whole as a result of the crisis can be remedied without diffi culty. Things will
be different, however, if growth in the postcrisis period is weaker than before the crisis.
In Section 1, it was argued that it is precisely this that is to be expected after the great
dual crisis of the world economy. If growth rates remain below earlier rates of potential
growth and unemployment, therefore, remains high for an extended period the public
coffers will experience prolonged diffi culties. Spending and benefi t cuts, as well as tax
and contribution increases could then quickly become the order of the day.
The European Commission presented the state of the public budgets of EU members
as a result of the crisis in a recent Communication to the European Parliament and
the Council (Commission of the European Communities 2009). This picks up from its
report of 2006 on the longterm sustainability of public fi nances in the EU (European
Commission 2007). In 2006, nine states were deemed to be in the low-risk group: now
there are only four (Denmark, Estonia, Finland and Sweden), together with a new EU
state, Bulgaria. In the medium-risk group in 2009 are Austria, Belgium, France, Germany,
Hungary, Italy, Luxembourg, Poland and Portugal. Twice as many countries as in 2006
are now in the high-risk group: Cyprus, the Czech Republic, Greece, Ireland, Latvia,
Lithuania, Malta, the Netherlands, Slovakia, Slovenia, Spain, the UK and new member
state Romania.
From its analysis of the mounting debt situation with regard to public budgets, the
Commission derives three demands: (i) the reduction of defi cit and debt ratios; (ii) an
increase in employment rates; and (iii) social security reforms, especially of pension and
health care systems.
It is therefore clear that the EU states, as a result of the effects of the world economic
crisis on the labour market, social insurance funds and state budgets, will intensify the
reforms of the welfare state which they have already been pursuing for a number of years.
Benefi t cuts and/or tax or contribution increases are on the agenda, if things remain the
same, especially in the group of high-risk countries, which in any case includes half of all
EU states. In the market states system this process of dismantling the welfare state could
give rise to multiplier effects, which ultimately even the medium- and low-risk countries
will not be able to elude.
2.3 Social Security in the Developing Countries
While in the industrialised countries social security is, in the main, guaranteed via
public systems and private insurance companies, the situation in the developing countries
is much more complex. Here the traditional forms of social security afforded by mutual
support groups (family, relatives, neighbours), and by membership of organisations

and associations (cooperatives, churches, benevolent funds) still play a larger role. Often,
these are the most signifi cant social security mechanisms.
The tables in the annex present data – if available – on the development of public expenditure
on social security in a large number of states throughout the world. The stark
contrast between the developed industrialised countries of Europe and the developing
countries in Latin America, Africa and Asia is immediately striking, as are the great differences
within the group of developing countries. While many states still spend only 1
or 2 per cent of GDP on state social security (including India, Pakistan, Indonesia and
the Philippines), others have sometimes made signifi cant efforts to increase spending
between 1995 and 2005/2006 or at least to maintain it at a comparatively high level (including
Tunisia, South Africa, China, South Korea, Mauritius, the Seychelles and some
Latin American countries), with values of between 5 and 20 per cent.
The most important target groups of comprehensive social security in many developing
countries are still state employees (armed forces, state offi cials and employees) – in
other words, the key pillars of the regime.
An extremely interesting development is taking place in the welfare states of East
Asia, including Indonesia, Malaysia, the Philippines, Singapore, South Korea and Thailand.
Here, the social situation of the population in the decades preceding the Asian
crisis in 1998/99 improved considerably. This was due primarily to the high GDP growth
rates and the high (male) labour market participation. Poverty rates decreased signifi -
cantly and life expectancy grew strongly.
These countries suffered a major setback as a result of the Asian crisis, however,
with negative growth rates and rising unemployment as a consequence of the outfl ow of
international capital. The countries in this group responded to this crisis in two different
ways. In Singapore, Malaysia, the Philippines and Indonesia the governments have
relied on the traditional adjustment strategies of their welfare regimes and have basically
shifted the social burden onto the family. In contrast, after the crisis South Korea, Taiwan
and Thailand began to expand their state social security systems (IMF 2009: database).
In these young democracies, the political parties became aware of the potential of social
policy for political mobilisation (Tangcharoensathien et al. 2009).
The different consequences which the welfare regimes of East Asia have derived from
the Asian crisis, and the great differences between relative spending on social security
in developing countries with a similar level of development raises the general question
of whether less developed countries would be better off building up their social security
systems or devoting all their resources to the pursuit of economic growth, since this
may lead quasiautomatically, via the socalled »trickle down effect«, to the reduction of
poverty there. This question was recently addressed by Michael Cichon and Wolfgang
Scholz in an econometric investigation (Cichon and Scholz 2009). The authors examined
for 22 OECD countries in the year 2000 the relationship between per capita income and
the poverty rate or between the social expenditure ratio and the poverty rate. The results
show that with an increase in either per capita income or the social expenditure ratio,
poverty rates fall, but the connection between the reduction in the poverty rate and the
increase in the social expenditure ratio is signifi cantly stronger than between the poverty
rate and per capital income. Cichon and Scholz conclude from this that a higher per
capita income can reduce the poverty rate, but that this effect is uncertain. In contrast,
the probability is much higher that poverty rates will fall in the event of an increase in the
social expenditure ratio (Cichon and Scholz 2009: 83f).
77

These results are confi rmed by studies on the impact of social security systems on
poverty rates in the European Union (Cantillon 2009). In the EU member states social
security systems contribute to a considerable reduction in poverty rates and, vice versa,
no EU member state – with the exception of Slovakia – has managed to achieve below
average poverty rates with below average expenditure on social security (Cantillon 2009:
220ff). The following refl ections are intended to show that the low income countries
could make good use of the positive experiences of the developed industrialised countries,
in particular the EU member states.
The following data show clearly how essential it is to develop strategies to reduce poverty
in the developing countries. According to the recent UN report on the achievement
of the Millennium Goals, between 1990 and 2005 the number of people living below the
poverty line of 1.25 dollars a day was reduced from 1.8 billion to 1.4 billion. While in
1990 almost half the population of the Third World was living below the poverty line, by
2005 this had fallen to one quarter. This is in large part due to economic growth in China
where, during the period in question, 475 million people were raised above the poverty
line (United Nations 2009: 7). While, on the one hand, this outlines the absolute and
relative dimensions of the problem of poverty in the Third World and, on the other hand,
shows that poverty rates could be sharply reduced by expanding public social security
systems – and better than by a strategy which concentrates exclusively on economic
growth – the question arises whether the developing countries can afford this expansion
of their social security systems and what the costs would be of building up a basic, but
comprehensive platform for social security in poor countries.
Christina Behrendt and Krzysztof Hagemejer addressed this issue in a recent study
(Behrendt and Hagemejer 2009). They fi rst defi ne a basic social security package for poor
countries, consisting of four components:
»1. universal basic old age and disability pension; 2. basic child benefi t, either universal
or limited to orphans only; 3. targeted cash transfer for the most vulnerable households;
4. universal access to essential health care« (Berendt and Hagemejer 2009: 101).
The costs of such a programme were worked out for seven African countries (Burkina
Faso, Cameroon, Ethiopia, Guinea, Kenya, Senegal and Tanzania) and fi ve Asian
countries (Bangladesh, India, Nepal, Pakistan and Vietnam). Benefi ts in this package
are oriented towards the poverty line defi ned by the World Bank, which amounts to 1
US dollar a day per person in PPP. Old age pension and disabled benefi ts are assumed
to be 0.5 US dollars a day per person and child benefi ts 0.25 US dollars. The health care
package is based on the work of a WHO commission and includes 49 medical interventions
for the population of developing countries (Commission on Macroeconomics and
Health 2001).
The fi nancial burden of the total social security package for the countries examined
amounts to 6.4 to 17.3 per cent of GDP in 2010, with a range of 6.4 to 11.4 per cent in eight
countries, and 14.7 to 17.3 in the other four countries. The bulk of the burden derives
from the health care package (Berendt and Hagemejer 2009: 109f).
Since these burdens cannot be borne by many of the countries under examination,
measured against current expenditure, the authors calculated the domestic resources
needed based on the assumption that these states devote 20 per cent of their budgets to
social security. On this basis, the cost burdens come out at between 2.4 and 5.8 per cent
of GDP in 2010. By deploying these resources, India would be able to cover 90 per cent
of the basic package already in 2010, while Pakistan, Cameroon, Vietnam and Senegal
78

would be able to cover between 90 and 100 per cent by 2030. In many countries, however,
even by 2030, the level of coverage would only be between 20 and 50 per cent (Berendt
and Hagemejer 2009: 113f). Without aid from the international community, therefore, a
basic social security package cannot be achieved.
Social security systems are not only the most suitable strategies for reducing poverty
in low income countries; they are also a basic requirement for economic development.
Only by means of basic health care can the population’s ability to work be maintained in
developing countries. Only through cash transfers for children and old people do families
have suffi cient resources to send their children to school rather than to work, thereby
making it possible to improve young people’s qualifi cations. Only by means of a basic
social security package can the strain be alleviated to such an extent that women can
increasingly pursue gainful employment (Barrientos 2009; Lund 2009; Samson 2009).
Many underdeveloped countries have now introduced various cash transfer schemes
for the poor and basic health care services, although most such schemes do not have
anywhere near 100 per cent coverage. India, China, Brazil, Mauritius, the Seychelles and
South Africa can be cited as examples.
To summarise, the following can be said about social security systems in the developing
countries:
1. Social security systems can be found in poor countries to varying degrees. Almost half
the world’s population, according to ILO calculations, are excluded from public social
protection in any form. In South Asia and Subsaharan Africa, the fi gure is around 90
per cent. In middle income developing countries this still applies to between 20 and
60 per cent of the population (Townsend 2009b: 250).
2. Since the problem of poverty in the developing countries remains exceptionally serious
and social security systems contribute to a greater extent to the reduction of
poverty than pure economic growth, the introduction and expansion of public social
security systems in the developing countries is of the highest priority.
3. Public social security systems are associated with a higher fi nancial burden (more
than 10 per cent of GDP) for the developing countries than pure cash transfer systems
for the poorest sections of the population (around 3 per cent of GDP). In low
income countries, therefore, cash transfer programmes are more widespread, while
many middle income countries have already begun to set up and expand public social
security systems.
4. Basic social security packages are fundable by many developing countries, but in
many other cases they must be supported by aid from the international community.
This obligation on the part of the richer countries can only increase on the basis of
the negative consequences of the global economic crisis, for which the poor countries
are not responsible.
2.4 Effects of the Crisis on the Social Situation in the Developing Countries
Given that in the developing countries millions of people live on the margins of or below
the subsistence minimum the effects of the global economic crisis are more dramatic
in these states than in the industrialised countries. However, the picture is extremely
differentiated in the developing countries, too. Hardest hit are the low income countries,
which have suffered disproportionately from the decline in world trade and world commodity
prices.
79

Falling and negative growth rates in many regions of the Third World mean a fall in
income for millions of people below the UN poverty line of 1.25 US dollars per day. It
also means that the proportion of employees who earn less than 1.25 US dollars per day
will increase. With regard to the effects of the global economic crisis the UN estimates
that, in 2009, between 55 and 90 million more people will be forced below the threshold
of 1.25 US dollars per day (United Nations 2009: 6).
UN data also make it clear that, as a result of the most recent economic developments,
the share of the population in the developing countries suffering from hunger in
2008 will either remain the same in comparison to 2004–2006 (South Asia, not including
India, South East Asia, Latin America and the Caribbean, North Africa) or increase
(Subsaharan Africa, East Asia, not including China, Oceania). In developing countries as
a whole, the proportion of people suffering from hunger has increased from 16 to 17 per
cent, after witnessing a fall of 4 percentage points between 1990–1992 and 2004–2006
(United Nations 2009: 11).
Just as many low income countries have been less successful than many middle income
countries in setting up public social security systems, the effects of the global economic
crisis are also very different between the two groups. The low income countries have been
harder hit, in particular if they are more integrated into the world economy. Poverty rates
have risen as a result of the crisis, as has the proportion of the population affected by
hunger, while the share of employees earning more than 1.25 US dollars a day has fallen.
Informal social safety nets have been exposed to heavier burdens and cash transfer systems,
if they exist, are becoming more expensive and threaten to overwhelm the domestic
resources of many countries. If growth remains weak in the world economy over the long
term, which appears probable, the problems of this group of countries will intensify.
The consequences for the middle income countries are different. In particular in the
most populous states, such as China, India, Indonesia and Brazil, although growth rates
are currently falling, there is considerable potential for stronger domestic oriented growth.
Here there is every chance that growth rates, even under new conditions in the world
economy, will pick up again and therefore the material basis for the establishment and expansion
of public social security systems will improve. Since East Asia, with China, will in
future become the new centre of growth of the world economy, after the crisis the circumstances
of countries such as South Korea, Taiwan and Thailand will also improve, enabling
them to continue the successful expansion of their public social security systems.
While the situation in the developing countries is becoming more and more diverse
as a result of the crisis, in the group as a whole the achievement of the Millennium Development
Goals by 2015 is under threat. That applies in particular to the goals related to
poverty reduction, malnutrition and decent work. But this only increases the obligation
of the rich countries to develop new strategies to support low income countries.
80
3 ALTERNATIVES TO THE STATUS QUO IN THE WORLD ECONOMY,
THE EU AND GERMANY
The analysis so far has shown that, if policy as usual is maintained, growth rates
in the world economy, in particular in the industrialised countries and the low income
countries, will be very low and the economic imbalances, both between the United
States, Japan, China and Germany and within the Eurozone will be sustained or be re-

duced only very slowly. Besides that, the status quo scenario harbours a major risk that
the world economy will soon be shaken once again by regional or global fi nancial market
crises. Public debt and unemployment will remain very high in the industrialised countries
under these conditions and, as a result of stagnation, no new sources of taxation
can be tapped into. The welfare states in these countries will experience contribution
increases and/or cuts in services. In the low income countries weak growth and higher
unemployment will drive poverty rates even higher and traditional social security systems
– families, relatives, neighbours, local communities – will be subject to additional,
almost unbearable burdens.
In light of these prospects the discussion of alternative solutions should be much
more intensive. The alternatives can be identifi ed on three levels:
At the global level, a new global monetary system should be established, a new architecture
for world fi nancial markets should be developed and a fi nancial instrument
should be created to promote the establishment and expansion of public social security
systems in the low income countries.
In the European Union, a new economic policy regime should be introduced which
includes both a European economic government and rules for the avoidance of distortions
of competition within the Eurozone.
At the national level, for exportoriented countries, such as China, Japan, Germany,
Ireland, many Central and Eastern European countries and many low income countries,
a strengthening of domestic economic forces is on the agenda in order to fi nd a new balance
between the global and the domestic market.
3.1 Reform of the World Economic Order
New Monetary System
If the global imbalances in current accounts and currency reserves are to be corrected,
fi rst of all the world monetary system must be reformed. A system of fi xed, but
adjustable exchange rates should be reintroduced. Instead of the dollar or some other national
currency, special drawing rights should be installed as reserve currency. In order to
avoid delayed adjustments and so distortions of competition, as well as speculative movements,
additional rules should be introduced in accordance with which, at a certain level
of current account imbalances in relation to GDP, exchange rate corrections should be
implemented. These rules would be monitored by the IMF, which would also be responsible
for the allocation of international foreign currency loans, as well as the issuing and
adjustment of special drawing rights. It should also be debated whether or not the IMF
should be given the authority to impose economicpolicy conditions on countries with
large imbalances and in relation to exchange rate corrections. Only a regime of this kind,
in connection with a reordering of world fi nancial markets, can cut global imbalances
and prevent the emergence of new distortions. Its introduction is, of course, conditional
on the willingness of the most important global trading nations to submit their economic
policy to such new »rules of the game«.
New World Financial Market Architecture
Alongside reform of the world monetary system, the second important element of a
reorganisation of the world economy is a new architecture for world fi nancial markets. In
order to avoid crises on world fi nancial markets, as far as possible, fi rst, the main causes
81

of the present crisis should be eliminated: fi rst, the reduction of global current account
imbalances and the high international capital fl ows connected to them – in other words,
the abolition of the »Chimerica« system (see above) – and second, a drastic correction of
the unequal distribution of incomes and assets within nationstates (see below). Besides
these two decisive steps, the reregulation of markets is necessary. A restructuring of
world fi nancial markets should basically include the elements listed under point (x) in
Section 1.
At present, such radical reregulation of world fi nancial markets is being called for
only by some prominent academics, such as Joseph Stiglitz, Paul Krugman and Robert
Shiller. Government and central banks have so far shied away from such comprehensive
regulations.
Tax for Social Security Systems in the Developing Countries
As a third element of the reorganisation of the world economy a new funding system
should be created for achieving the UN’s Millennium Development Goals. In the sections
on the social security systems of developing countries and the effects of the world
economic crisis on them we have seen that setting up public social security systems is
the best way of combating poverty; that the introduction of basic systems of social protection
is fi nancially feasible, even if international aid would be necessary; and that, as a
result of the crisis, in particular in the low income countries these systems have been put
under enormous pressure. The world economy should therefore introduce a new funding
system to promote the expansion of public social security systems in the developing
countries. Given the responsibility of the rich countries for the global economic crisis,
this is a moral imperative.
The international debate on additional fi nancial resources for achieving the Millennium
Development Goals, which has primarily been conducted within the framework
of the UN since the turn of the millennium, should be followed up here. The main focus
is the taxation of currency transactions, which James Tobin proposed as early as 1972
to reduce international currency speculation. In 1994, the UNDP took up this idea in
its Human Development Report. Although the debate on the Tobin tax has been highly
controversial, since the outbreak of the global fi nancial crisis there has been renewed
enthusiasm for the idea. Depending on what forms of currency transaction the tax would
cover – foreign currency, spot, forward, swap and/or derivatives transactions – the funds
which can be tapped with this instrument differ. For a universal tax in the amount of
0.1 per cent, which also included transactions by travellers, as early as 2002 a sum of
400 billion US dollars was calculated (Townsend 2009c: 162). In this instance, eight industrialised
countries would account for 80 per cent of the funds (the UK and the USA
alone would account for 50 per cent). As an alternative to the Tobin tax, an international
fi nancial market tax could be introduced which has been brought into play in the context
of the current crisis as an extension of the basic notion of the Tobin tax.
With regard to the signifi cance of public social security systems for overcoming poverty,
the UN could develop a strategy on the creation and expansion of such systems in
low income countries which, besides mobilising the domestic resources of the developing
countries, provides for aid from the rich countries based on a Tobin tax. This would
constitute a decisive contribution by the rich countries to realising the Millennium Development
Goals and to assuming their responsibility for the social and economic costs
imposed on the developing countries by the world economic crisis.
82

3.2 Reforms of the EU Economic and Social Order
In the European form of Economic and Monetary Union, in which the currency is
a shared competence – in other words, it is European – but wage, social and tax policy
remain expressly in the hands of the member states, dumping is a structural inevitability.
In such a system of market states, nationstates compete for international investment on
the basis of wage and social costs, as well as corporate tax rates. The European Economic
and Monetary Union set in motion general competition in the reduction of wage costs,
the cutting back of the welfare state and lowering corporate taxes. These imbalances can
be avoided only if rules on competition with regard to wages, social costs and taxes are
developed in the EU.
New Rules for Wage, Tax and Social Policy in the EU
With regard to wage policy, since the Doorn Declaration in 1998 and the adoption
of coordination directives by various European branch organisations, the trade unions
have been trying hard to obstruct wage dumping in the EU. These directives call on the
member organisations to adjust national wage policy to the rule of thumb »infl ation rate
plus productivity increase«. If this directive was realised, nationally, distribution and, at
European level, competition, could be kept constant. In any case, the data on the development
of unit wage costs clearly show how far the European trade union movement still is
from realising these aims.
Nevertheless, these efforts must be intensifi ed considerably, since the stepping up of
intra-European wage competition – which in the Eurozone has, for years, derived in particular
from the reduction of unit wage costs in Germany – is leading to ever increasing
external economic imbalances between the member states. At the same time, as a result
of the redistribution in favour of capital the inequality of income distribution within the
nation-states is becoming more and more glaring.
Besides that, all 27 member states should introduce a minimum wage defi ned at European
level. This should amount to 60 per cent of the average wage in the respective EU
country. As a fi rst step, a minimum wage of 50 per cent could be set. Urgent action is also
needed to clamp down on the escalating tax dumping in the EU. Besides the introduction
of a common basis of assessment, agreement on minimum corporate tax rates is also
necessary.
With regard to social security systems, coordination at European level is urgent in
order to halt further competition-induced cutbacks in welfare states. For this purpose, a
European Social Stability Pact should be agreed at EU level, linking the size of the welfare
state to the relevant state’s level of economic development. In the EU there are four
or fi ve groups of states, measured in terms of per capita income. A band or corridor of
social benefi t ratios should be fi xed for each group. The group of richer countries should
have a higher corridor than the group of poorer ones. States can move to a higher corridor
from a lower one as they catch up economically.
The implementation of this kind of regulation would overcome the system of market
states. In keeping with the Social Stability Pact, in the EU an economic and social policy
of harmonisation while the improvement is being maintained would be pursued. Dumping
strategies, of the kind followed by Ireland and Spain, and in the meantime pursued
among the new member states by the three Baltic states and Slovakia, could in this way
be prevented from the outset.
83

A New Economic Design in the EU
Not only did the Maastricht Treaty establish the system of market states, but economic
policy was redesigned, within the framework of Economic and Monetary Union,
along neoliberal lines. The decisive elements here are the onesided orientation of the
European Central Bank’s monetary policy towards price stability, the primary responsibility
of member states’ fi nancial policy to consolidate state budgets and the absence of
European economic government.
While monetary policy competence within the framework of Economic and Monetary
Union was transferred to the European level, fi nancial policy is still the competence of
the member states. This leaves us with an asymmetrical design, with supranational monetary
policy but national fi nancial policy. At the same time, the Maastricht Treaty and EU
regulations, within the framework of the socalled Stability and Growth Pact, do subject
member states’ fi nancial policy to certain rules. Despite some fl exibility with regard to
the Stability Pact and its recent reform, the latent effects of the Treaty and the Pact in the
direction of a more restrictive fi nancial policy cannot be overlooked.
In contrast to the Werner Plan at the beginning of the 1970s, the absence of a European
economic government is another specifi c feature of the Maastricht Economic
and Monetary Union. According to the Werner Plan: »The basic parameters of overall
public budgets, in particular, changes in their volume, the size of balances and the
manner of their funding or use, must be determined at the Community level«. This formulation
was tantamount to the establishment of a European economic government,
which would decisively shape the economic policy of the Community and determine
the general orientation of national budgets within the framework of their fi scal policy
responsibilities. In the Delors Plan on the preparation of the Maastricht Economic and
Monetary Union, this parallelism of Europeanisation of monetary and economic policy
was rejected in favour of an asymmetrical design. A price has undoubtedly been paid
for this change of paradigm: in the EU, an economic policy decisionmaking centre is
lacking, which can effectively establish and coordinate the fi scal policy of the member
states and, in cooperation with the ECB, can ensure that there is an appropriate monetary
and fi scal policy mix.
In the current global economic crisis, which is hitting Europe hard, the defi ciencies of
the EU’s economic policy regime are glaringly obvious.
Both in the fi nancial market crisis and in the economic crisis the EU states have, initially,
reacted in a fragmented and uncoordinated way, sometimes at variance with one
another. In particular, between France and Germany there was no uniform position on
whether the crisis concerns Europe as a whole, what instruments are to be used to combat
it, what the extent of the response should be and when it should be implemented.
What eventually emerged were national rescue schemes for overcoming the fi nancial
market crisis, which differed considerably in terms of scope and, above all, the degree
of state intervention in the banking system. National economic stimulus packages also
differed widely in scope, the application of fi scal policy instruments and, especially, the
time of their adoption.
The EU cannot pursue a consistent economic policy with the one-sided orientation
of its monetary policy towards price stability and the existing fi scal policy structures,
with the member states as decision-making centres. A crisis which affects all EU states
– as the current crisis shows – will be combated too late, in a fragmented way and with
too few resources. The recession will, as a result, become stronger and last longer than
84

necessary. The following demands for reform arise from this criticism of the EU’s current
economic policy regime:
The European Central Bank should be equally responsible for high economic
growth, full employment and high currency stability. In this way, a procyclical interest
rate policy and the restrictive monetary policy currently pursued by the ECB would be
prevented.
In the short to medium term the aim must be to coordinate national policies at the
EU level in such a way that economic policy options are better utilised and proper coordination
can be achieved between European monetary and European fi scal policy. For
this purpose, the competence to determine the basic direction of member state fi scal
policy in accordance with their respective economic circumstances (a consolidation or
expansionary strategy) should be transferred to the European Commission, in cooperation
with the Council of Economic and Finance Ministers (ECOFIN), in keeping with
the Werner Plan. This would constitute a fi rst step towards establishing a European
economic government.
This extension of EU fi scal policy competence would, at the same time, render the
Stability and Growth Pact untenable, because it is based on member state competence
for budgetary policy. In this instance, the EU should develop a stabilisation concept for
the state budgets of the Union as a whole. A complex overall concept should take into
account both the cyclical and the structural debt situation of the whole Union, as well as
of the individual member states.
Long term, it is essential to transfer the competence for economic and cyclical policy
decision-making to the European level and, for this purpose, to furnish the EU with its
own complementary right to levy taxes and a bigger budget. France has been calling
for this under the heading of a European economic government for several decades. It
wishes to set up an equal ranking fi scal policy institution alongside the strong ECB in
order to create a level playing fi eld for monetary and fi scal policy and to enable an effective
European cyclical and economic policy. This demand should, generally speaking,
be supported. Fiscal policy must become European, in particular for the Eurozone. This
Europeanisation of fi scal policy is not an end in itself, however. It must be used to provide
for growth, employment and environmental restructuring. A European economic government
would be responsible for the implementation of an expansionary economic policy
for qualitative growth.
3.3 Germany: More Domestic Growth Instead of Export Dependency
Associated with the elimination of the various imbalances in the world economy,
already mentioned, is the need to restructure those economies which are exceptionally
dependent on exports (China, Japan, Germany, numerous CEE countries and developing
countries). These economies must fi nd a new balance between exports and the domestic
economy. If the global current account imbalances between the USA, on the one hand,
and China, Japan and Germany, on the other hand, are to be eliminated, the surplus
countries must increase their domestic absorption; that is, sell more of the goods and
services they produce in the domestic market. If the distortions of competition in the
Eurozone are to be removed, Germany must change its wage policy and increase domestic
demand at an above-average rate. If the Central and Eastern European countries and
developing countries which are particularly oriented towards the world market, and thus
85

are strongly affected by global crises, wish to reduce this dependency, they must gear
their economies more strongly towards the domestic economy.
The diffi culties associated with such a restructuring of economies are different for
each country. In what follows, the risks and possibilities of this strategy for Germany are
examined in more detail.
At fi rst sight, the attempt to fi nd a new balance for Germany between the domestic
economy and exports seems hopeless, while the political and social forces which are betting
on a revival of the export strategy after the world economic crisis seem to be right.
How an above average increase in private consumption is to be possible, given higher unemployment
and the weakness of the trade unions, is not readily discernible. Support for
a restructuring of the German economy seems unlikely to be forthcoming from the state,
although the debt ratio, which stands at 80 per cent in 2010, is heading for 100 per cent
in 2020. In this situation, it would appear, the state has only one political duty to fulfi l: to
reduce its debts through severe cuts. There seems little scope for aboveaverage growth in
public spending within the framework of a rebalancing of the economy.
The upshot of this is a scenario for the German economy in which exports will no
longer be able to emulate the growth rates of previous years due to the reduction of
imbalances in the world economy and in the Eurozone; private consumption will be constrained
by unemployment and weak trade unions; and the state, because of the need
to pay down its debts, will have the option only of a belowaverage spending increase. In
this diffi cult environment, even private investments – as the last macroeconomic demand
factor to be considered – cannot, unlike Baron Münchhausen, pull themselves out of the
swamp by their own hair. The vicious circle of stagnation seems unavoidable.
An alternative strategy to break out of this stagnation scenario must once more rely
on the state as key variable. A way must be found for the state to reduce the debts it has
accumulated on account of the crisis and, at the same time, mobilise resources for public
investment in education, health care and the environment. The point of departure for
this strategy is the sharp rise in inequality of income and wealth in recent years, which
critics have identifi ed as one of the decisive causes of the world fi nancial crisis (Schäfer
2009; Stiglitz 2009). In Germany, the wage share fell from 69 per cent in 1991 to 62 per
cent in 2006. In parallel with this, the investment ratio has not increased, as might be
expected, given the strong increase in the profi t share: it fell from 23.25 per cent in 1991
to 17.84 per cent in 2006.
More or less the same can be said for the EU as a whole between 1975 and 2006.
While the profi t share rose from 24 to 35 per cent, over the same period the investment
ratio in EU member states fell – with some cyclical fl uctuations – from 24 per cent to 20.5
per cent (source: European Economy, in Huffschmid 2009: 107). With regard to wealth
distribution in Germany, the following data are important: the share of net wealth of the
top 10 per cent of households increased from 44.7 per cent in 1993 to 61.1 per cent in
2007, while the share of the lowest 10 per cent fell during the same period from –0.2 per
cent to –1.6 per cent. Furthermore, as a result, the debts of the latter group rose during
this period (Hirschel 2009: 93).
This increasing concentration of income and wealth, which is a worldwide feature
of capitalism, has not led to strong growth in productive assets, but has been invested
overwhelmingly as monetary capital. While world GDP grew approximately fi vefold between
1980 and 2007 – from 10 trillion US dollars to 55.5 trillion US dollars – global
fi nancial assets during this period grew from 12 trillion US dollars to 197 trillion US
86

dollars, a 17-fold increase (OECD, in Huffschmid 2009: 108). Global fi nancial assets are
now more than four times larger than global GDP. Given these extremely undesirable
developments, corrective state intervention via the tax system is a matter of both social
justice and economic rationality.
From the standpoint of social justice, further divergence within society is more unjustifi
able than ever. The income and wealth of the poorest 20 per cent in society is falling,
while that of the richest 20 per cent is skyrocketing. Between these two social strata there
is virtually no common social bond any more. Rupture looms, with unforeseeable consequences
for Germany’s political and social development.
Economically, it makes no sense that a large proportion of fi nancial resources are
risked in fi nancial markets, where they have caused a crisis, which has taken the world
to the edge of the abyss, while the costs of rescuing the fi nancial markets and the real
economy have been loaded onto the state. The state should, instead, appropriate some of
these resources through its tax policy in order, fi rst, to diminish the crisis risk, second,
to pay down its debts and third, to provide for a new balance between foreign trade and
the domestic economy through public investment in education, health care and the environment.
Given the defi cits which Germany has posted with regard to the education sector,
by OECD comparison, a signifi cant increase in public spending is urgently required in
primary, secondary and higher education.
The improvement in human capital that this would bring about would increase potential
growth in Germany by 0.5 to 1 per cent, so that in the longer term it would be selffi -
nancing. Investment in the health sector likely to increase longterm growth would also be
benefi cial, as in the education sector, necessary improvements in workplace health care
have been urged for years, in the face of demographic change, in order to prolong working
lives. What is needed here is, on the one hand, investment in occupational training
and retraining and, on the other hand, investment in healthy workplaces, adapted to the
needs of older workers. Here too the experience of many countries – for example, Sweden
– indicates that, through measures of this kind, the labour force participation rate of
older workers can be markedly increased, with positive effects on potential growth and
the fi nances of social security systems.
Another sector in which public investment must be urgently increased is the environment.
Given the dangers of climate change Germany should signifi cantly increase its
investment in alternative energy systems, energy effi ciency measures, public transport
systems, alternative propulsion systems for cars and coastal protection.
The resources available for investment programmes of this kind in education, health
care and the environment, if the state had the courage for an alternative tax policy, are
shown by the following comparative fi gures: net private assets in Germany are worth
around 6 trillion euros, while GDP is around 2.5 trillion euros. This means that, even with
a 1 per cent wealth tax, resources in the amount of a good 2 per cent of GDP could be collected.
The 60 billion euros or so which will be lost to the state each year, until 2013, due
to the crisis could be made good with only a 1 per cent wealth tax. These data show that,
with a combination of fi scal intervention in the form of the reintroduction of a wealth tax,
higher income tax for the top income quintile and progressive taxation of the liabilities of
fi nancial services companies – as a liability premium for the costs born by the tax payer in
the event of fi nancial crises – both suffi cient resources would become available to allow the
state to pay down its debts and to fund public investment programmes.
87

A reform policy of this kind can in no way be construed as anticapitalist, but instead
would serve to stabilise the capitalist economic and social order by diminishing
its selfdestructive forces. A reform policy which sets its face directly against the hitherto
dominant neoliberal paradigm is necessary, not just for Germany, but for many advanced
industrialised countries. Only by means of a heavier tax burden on the higher
income and wealthowning strata and on the fi nancial sector can the state budget reduce
its debts suffi ciently and fi nancial leeway be created for a domestic economyoriented
growth strategy.
88
4 SUMMARY
We began by presenting ten arguments to substantiate the assertion that, after the
present dual crisis has run its course, a return to the very high precrisis growth rates is
very unlikely, and instead we should count on a period of lower growth. In the following
section, the consequences of the world economic crisis for social security systems in
Europe and the developing countries were discussed. While in Europe, cuts in services
and/or contribution or tax increases are probable, the situation in developing countries
is more diverse. In many low income countries the crisis has led to more poverty and
hunger, as well as the imposition of excessive demands on traditional, informal social
protection systems or the basic cash transfer systems which are being set up in many
states. In contrast, middle income countries, such as Brazil, India and China, are registering
aboveaverage growth rates which are enabling them to expand their social security
systems further. In a third step, numerous reforms are proposed for the world economy,
Europe and Germany which could help to reduce global economic and social imbalances
in order to make possible balanced and crisisfree growth in the world economy. These
reforms are: a new global monetary system, a radical restructuring of world fi nancial
markets, the introduction of a Tobin or fi nancial market tax to support social security systems
in low income countries, the elimination of the internal European system of market
states by regulating wage, tax and social policy at EU level, the setting up of a European
economic government, the paying down of public debt through higher taxes on the top
income and wealthowning classes, as well as heavier taxation of the fi nancial sector and
signifi cant expansion of public education, health care and environmental policy in order
to bring about the restructuring of Germany’s export model to a more strongly domestic
oriented growth model.
By implementing this comprehensive international, European and national reform
package, the stagnation threatening the world economy can be overcome and the economic
and social imbalances we have analysed, which form the basis of the crisis, can
be eliminated. Individual reform measures may well have a negative effect on growth
in individual states, such as the reform of the world monetary system (China) and the
coordination of wage policy in the Eurozone (Germany). All in all, however, the reform
package will reduce economic and social tensions in the world economy, in Europe and
in nationstates and so lay the foundations for a sustainable growth path. 1
1 After this manuscript was written, the book Der gute Kapitalimus … und was sich dafür nach
der Krise ändern müsste, by Sebastian Dullien, Hansjörg Herr and Christian Kellermann appeared
(Bielefeld: transkript, 2009; English translation: forthcoming). In this book, similar basic ideas and
reform proposals are put forward as in this paper. It is strongly recommended.

APPENDIX
Table: Public expenditure on social security and health care as a percentage of GDP
Africa
1995 2000 2005 2006
Burundi 3,29 - - -
Congo - - 1,17 -
Egypt 5,30 1,35 8,64 15,23
Kenya 0,12 1,50 2,14 3,01
Liberia 12,93 - - -
Madagascar 7,34 - 2,18 1,41
Mauritius 6,07 7,13 7,96 8,34
Morocco 3,31 - - -
Senegal - 0,67 - -
South Africa 6,25 6,88 8,83 -
Tunisia 7,50 7,99 8,83 9,08
Uganda - 0,53 3,77 4,11
Zamibia - - 2,54 1,77
Zimbabwe 4,53 - - -
America
1995 2000 2005 2006
Argentina 11,24 10,79 10,78 -
Bahamas - 4,19 4,35 -
Bolivia 4,89 9,07 8,44 7,69
Canada 23.99 19,14 19,13 19,37
Chile 8,42 10,01 8,95 8,25
Costa Rica 9,09 10,40 9,26 10,03
Dominican Republic - 3,46 - -
Dominica 2,25 - - -
El Salvador - - 5,71 6,93
Guatemala - 1,01 1,03 1,27
Jamaica 2,46 1,59 3,35 4,20
Mexico 3,68 3,99 - -
Panama 11,21 9,19 - -
Saint Vincent and the Grenadines 6,10 7,27 6,73 -
Seychelles 11,83 11,49 13,84 20,35
Trinidad and Tobago 7,59 - 5,37 4,95
Uruguay 18,95 20,98 6,15 8,83
Venezuela - 4,66 4,06 -
89

Asia
90
1995 2000 2005 2006
Afghanistan - - 1,30 1,88
Azerbaijan 6,46 - - -
Bahrain 3,64 3,26 3,96 -
Bangladesh - - 1,22 1,19
Bhutan 2,67 3,82 2,57 -
China 0,75 3,93 4,99 5,33
Cyprus 9,83 11,06 14,41 23,21
Georgia - 4,92 7,07 6,64
Hong Kong - - 5,25 4,55
India 1,60 0,85 0,87 0,27
Indonesia 1,35 - 1,37 -
Iran 4,49 7,36 8,54 11,31
Israel 17,03 17,21 17,63 16,53
Japan - - 18,98 19,31
Jordan - 8,44 4,06 14,32
Kazakhstan - 8,67 6,87 6,32
Korea 1,46 3,31 2,68 4,55
Kyrgyzstan - 5,19 - -
Kuwait 11,12 - 7,10 5,23
Kyrgyzstan 4,41 - - 5,86
Lebanon 3,15 - - -
Macau - 4,64 3,53 2,88
Malaysia 2,65 - - -
Maldives 4,77 5,12 6,07 8,32
Mongolia 6,44 10,40 - -
Myanmar 0,76 0,48 0,44 -
Nepal 0,68 1,41 1,51 1,55
Oman - 4,30 - -
Pakistan - 0,27 0,15 0,20
Philippines 1,16 1,22 1,20
Qatar 2,65 2,04
Singapore 2,03 1,63 1,52 2,17
Sri Lanka 4,52 5,19 4,94
Syrian Arab Republic 1,49
Tajikistan 3,29
Thailand 1,92 2,57 4,06 3,29
Turkey 1,39 3,05
Viet Nam 4,27 3,21 2,66

Europe
1995 2000 2005 2006
Albania 10,84 - 9,87 10,06
Austria 29,52 28,62 27,74 27,32
Belarus 16,73 16,00 18,49 18,47
Belgium 24,06 23,11 24,65
Bulgaria 14,81 17,62 17,84 16,67
Croatia 20,19 26,66 22,09 21,47
Czech Republic 17,01 19,26 18,64 18,76
Denmark 28,10 29,27 28,44
Estonia 14,39 14,60 13,93 13,61
Finland 26,03 28,03 27,24
France 28,84 27,76 29,64 29,51
Germany 25,69 28,09 27,27
Greece 21,29 20,96 22,33 22,66
Hungary 21,11 - 22,51 23,15
Iceland 16,95 16,54 17,14 16,23
Ireland 18,17 13,48 17,47 17,53
Italy 23,62 23,51 25,01 25,22
Latvia 17,08 16,10 12,68 12,81
Lithuania 15,80 14,83 15,27
Luxembourg 19,91 31,09 29,03
Moldova 15,16 15,52 20,07
Netherlands 23,64 20,35 21,05 22,36
Norway 24,60 22,41 23,51 22,39
Poland 23,08 21,12 21,87 21,67
Portugal 18,83 23,04 23,16
Romania 12,71 14,53 13,43 13,61
Russian Federation 10,06 12,66 12,29
Slovakia 18,30 17,90 17,55
Slovenia 21,49 23,84 23,43 22,75
Spain 19,76 18,28 18,59 18,58
Sweden 22,64 29,39 30,18 29,50
Switzerland 25,28 25,39 18,16 18,57
Ukraine 17,38 23,94 23,82
United Kingdom 24,40 23,08 22,86
Source: International Monetary Fund (IWF) (2009): Social Security Expenditure Database,
Washington.
91

92
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93

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94

A NEW START IN ECONOMIC POLICY
Beyond Financial Capitalism
‘Germany must get moving’, the former German President Herzog demanded in 1997. Ten
years later, this move has encompassed not only Germany, but gone through the entire world
– but not in the way Roman Herzog imagined. Those who for thirty years preached that we
should trust the self-regulating power of the markets and worshipped the lean state as the best
of all possible states now suddenly have moved to doubt the markets’ power to heal themselves
and call for the state to be their saviour. Friedhelm Hengsbach – one of the best known German
commentators on ethical issues – not only deals in this article with the search for causes of the
current fi nancial and economic crisis but also offers scenarios for the future.
Friedhelm Hengsbach 1
This article authored by Friedhelm Hengsbach was originally published by Friedrich-
Ebert-Stiftung, London Offi ce, London, 2009
FINANCIAL EXPERTS SEARCH FOR THE ERRORS
‘Certainly the banks have made mistakes’, Klaus-Peter Müller, the former boss of
Commerzbank, admitted in an interview. But he stated exactly the same thing fi ve years
ago. He never said what the mistakes were. However, he sees the real cause of the crisis
in a twofold failure by the state. After the speculative bubble of the 1990s, Alan Greenspan
should never have operated such an expansionist monetary policy. And the Bush
administration should not have let Lehmann Brothers go to the wall. But for the collapse
of that bank, Commerzbank, would have posted good results.
‘I can hardly bear to hear the word greed anymore.’ That sentence is by Hilmar Kopper
(former CEO of Deutsche Bank). If by these words he means that to explain away the
fi nancial cri sis simply as the result of individual mistakes is itself mistaken, then one can
agree with him. Because the moral outrage of voters stirred up by politicians with their
broadsides of insults, or the pillorying of actors, are just as misguided as the fi xation of
public debate on the bonus payments to fi nancial managers who have driven their banks
to the wall.
Financial experts are right to direct attention to the miscalculation of risks which had
grown ex ponentially alongside the innovative fi nancial services, shadow banks, bankfree
zones and the immeasurable extent of networking among the actors in the monetary
sphere. Home own ers, it was claimed, had miscalculated their long-term ability to keep
up payments; dealers had forced mortgages on them in a wildly over optimistic manner.
Departmental heads in commercial banks allegedly failed to supervise and support their
subordinates adequately.
1 Friedhelm Hengsbach is a Jesuit and Professor Emeritus of Economics and Ethics at the
Philosophi-Financial experts are right to direct attention to cal-Theological University St. Georgen
(Frankfurt).
95

Trading in derivatives, securitising loans and structuring them outside the banking
supervi sory body, founding off-balance sheet compa nies as special purpose vehicles, insuring
de fault risks and securitising them, and channel ling supposedly innovative, but
actually incom prehensible, uncontrollable fi nancial services into the global fi nancial
cashfl ows to the extent they did, are now seen as demonstrating gullibil ity, naivety and
irresponsibility. Nevertheless, public supervisory bodies had also largely toler ated such
practices and assessed them in an unduly lax manner.
96
SYSTEMIC ERRORS
The search of the fi nancial experts for errors does go beyond the normal microeconomic
per spective, but it remains within the boundaries of the established fi nancial sector.
For that reason, there should instead be a search for the struc tural defi cits of the
capitalist fi nancial regime.
The fi rst point to mention is the ‘monetary revo lution’. The elastic money supply, along
with an unrestrained grab for ‘the earth as a global piggy bank’ is a crucial explanation of
the dy namics of capitalism. The natural limits of a bar ter or metal currency have been overcome
since the banking system gained unrestricted power to print and lend money, which
in turn no longer imposes any limits on the growth of the real production potential.
And for wealthy sections of the population in economically affl uent societies, money
is no longer used simply as a means of exchange, but also has assumed the function of
a capital asset. As a means of storing and increasing value, it competes against property,
consumer durables and stocks.
Secondly, the means for controlling the markets for goods and for capital are now
diverging from one another. Controlling the markets for goods, as refl ected in price levels,
is restricted by real factors of production and real purchasing power. Controlling the
capital markets, especially those involving fi nancial assets, is determined on the demand
side by subjective future expectations, which are not restricted by any real barriers.
On the supply side, there is an absence of re straints on the potential of the banking
system to create credit, especially as the limits imposed by the central bank, which previously
also had constituted a barrier within the real economy, are being evaded. The results
have become evident in recent years: The interplay between the expansive granting
of credits by the banks and the explosive expectations of the owners of fi nancial capital
that its value will automatically increase, have pushed one another up higher and higher.
Thus the expectations of fi ctitious, credit-fi nanced increases in assets were able to spiral
speculatively upwards and divorced themselves from the economics of the real world.
Thirdly, the limitations on liability which were granted to Public Limited Companies
(PLCs) were further undermined by the investment banks and fi nancial investors, leading
to sys tematic under-capitalisation. On the basis of an extremely low proportion of
own capital, and the leverage effect of a high proportion of external capital, the yield on
own capital could be ex panded considerably. International accountancy rules displayed
values close to those of the market, but they were based more on fi ctitious expectations
than on real capital gains.
Fourthly, the rivalry between two fi nancial styles, the continental European and the
Anglo-American models, has contributed to the crisis through the hegemonial dynamic
of the US fi nancial model. Michel Albert has called ‘Rhen ish capitalism’ bank-dominat-

ed: Private com mercial banks control industrial companies through granting loans, their
own holdings and personal relationships.
Companies are managed by the interplay of all the groups active within them, which
are ori ented towards reaching a mutual understanding. The managers work at balancing
the interests of staff, customers, shareholders, banks and local authorities. Systems
based on solidarity and fi nanced on a pay-as-you-go basis provide as surance against the
risks to society posed by old age, poverty and unemployment.
Anglo-American fi nancial capitalism, on the other hand, is driven by capital markets.
Mar kets for stocks and derivatives predominate, and collective actors (big banks, insurance
companies, investment fi rms and fi nancial in vestors) operate in them. Companies
are a capi tal investment in the hands of the shareholders. Their value is determined using
a purely fi nan cial indicator: the ‘shareholder value’, the bal ance of future fi nancial
streams, discounted to the present.
The managers work exclusively in the interests of the shareholders and therefore base
deci sions (and their salary) on the stock market price, which allegedly provides an authentic
re fl ection of the company’s value. The interests of staff, customers, local authority
and state institu tions are seen as secondary.
THE STATE: PART OF THE CRISIS
The state is neither the saviour from the crisis, nor the solution to it. The social crisis and
the fi nancial crisis are two aspects of the same failed economic, fi nancial and social policy.
In Germany, the negligence of the Red-Green Coalition (1998–2005) reduced social
security and deregulated the job market. It distorted the pensions, health and unemployment
insurance schemes to the extent of destroying the system. Security systems which
were supposed to guar antee a standard of living acquired during years of work, was
cut back to the level of a socio cultural minimum for mere existence. At the same time,
private, capital-fi nanced provisions were advocated. There was a tendency to put the
burden of social risks onto the individual, to privatise security which had been based on
solidarity and to commercialise basic rights to work, income, involvement in society and
ap propriate access to educational and health goods.
Since the Otto Graf Lambsdorff/Hans Tietmeyer Paper of 1982, bourgeois elites have
demanded fl exible wage agreements, a reduction in job se curity and the establishment
of a low wage sec tor. The Red-Green Coalition gave in to these demands – through a succession
of laws to en courage employment, agency work, part-time and temporary work,
and the undermining of job security.
The result has been documented by the 3rd Report on Poverty and Wealth of 2008:
An in creasing risk of poverty, the dramatic increase in insecure jobs and in poverty even
when peo ple are in full-time paid employment. The diver gence between income from
profi ts on the one hand, and from wages on the other, and the di vergence in amounts of
capital owned, have fur ther increased due to an asymmetrically de signed fi scal policy.
More or less parallel to the deregulation of em ployment came the deregulation of
the fi nancial sector. During the second legislative term of the Red-Green coalition, the
restrictions on stock market trading were loosened, trading in deriva tives and special
purpose vehicles was permit ted, and the banks’ profi ts from sales of their in dustrial
holdings were made tax-free. Hedge funds were permitted in the form of umbrella funds,
and the securitisation of loans was fi s cally supported.
97

These moves to relax the rules were justifi ed by EU guidelines and the need to protect
investors, but they were also rooted in the desire to make Germany competitive in world
fi nancial markets. Then the Grand Coalition (since 2005) did its best to support innovative
fi nancial services and sales channels and to give fi scal privileges to venture capital
companies.
The German government was also quick to re act to the howls of anguish from the
fi nancial el ites. Did it feel itself a helpless victim to the pressures coming from the Irish,
British and French governments? Did it fall for the apoca lyptic picture painted by the
mega-banks and the public fi nancial supervisory authorities?
The way it reacted was similar to the excited performance of the stock exchange investors,
that is, it acted in isolation, in a knee-jerk, exag gerated and spectacular manner.
Hardly anyone contradicted Finance Minister Peer Steinbrück, whose fi rst desire was to
tidy up the scene of the accident before interviewing any of those responsible for the
damage. And Steinbrück pledged that he would put out the fi re immedi ately, even if it
had been caused by arsonists.
But there was an alternative to passing round the umbrellas which were unfurled over
an acci dent scene lost in fog. The political elites have become accustomed to using this
cliché to cover up their notorious shortage of new ideas. Instead of attempting an across
the board res cue operation, the individual sources of the fi re should fi rst have been identifi
ed and extin guished in the most appropriate ways.
A careful search for evidence would have dem onstrated that the ‘counterfeiters’ included
mainly private investment banks, German Landesbanken (publicly owned regional
banks) and those institutes which had already been hived off and abandoned by the
banks which had owned them. The fact that the German govern ment invited the arsonists
to drive the fi re en gine gave them a privileged position in drawing up the state rescue
package and thus protected them and the ministerial steering committee against any
objections from the German Parlia ment. This cannot be reconciled with the basic norms
of public opinion in a democracy.
The citizens’ suspicion of the collaboration be tween the government and the fi -
nancial elites is well-founded. For the often quoted phrase ‘too big to fail’ would have
justifi ed the breaking up of the mega-banks and insurance companies, rather than the
setting up of new mergers and take overs with public funds to create even lar ger fi nancial
giants.
Were there really no alternatives to the govern ment’s rescue packages? Should the
state have guaranteed not the banks, but only the savings held in the accounts of citizens
who will never have the chance to live just from the interest on their capital? Should it
have permitted rich households to suffer fi nancial losses, and in deed reintroduced progressive
taxation of their income and capital?
The state could have put its trust in liquidity as sistance to be provided by the
central banks, and pressed the powers-that-be among the fi nancial institutions to
make their own advance payments as a sign of mutual confidence, and as a measure
of subsidiarity, to organise sup port among themselves and show solidarity. Obviously
when Finance Minister Steinbrück quoted the phrase: ‘When the heavens cave
in, all the sparrows are dead’, he was simply par roting the rhetorical clichés of the
financial el ites.
98

SCENARIO FOR THE FUTURE
The state’s decision-makers should as a fi rst step be prevented from mobilising public
fi nan cial resources which do not belong to them, and from stuffi ng them down the
throats of those fi nancial companies which provide them with the label of ‘systemic relevance’.
Distributing state stimulants to private banks so that they can restart those credit
dealings which serve principally to increase the capital assets of an exclusive club of rich
elites, subjecting successful companies to the dictates of instant profi ts from fi nancial
investors and at the same time forcing through a reduction in wage levels, cuts in social
service provision and the under mining of public fi nances – that just cannot be justifi ed.
Giving the kiss of life to fi nancial capitalism will trigger justifi ed unrest among sections
of the population.
Secondly, large sections of the population are living in poverty. Elementary material
needs are in short supply on a worldwide scale, and vital needs are not even being satisfi
ed in affl uent countries. Public goods to satisfy basic needs and rights are not available
to an adequate ex tent. Financial capitalism serves mainly a pri vate minority among the
capital-owning class.
Increasing economic value-added and providing decent jobs should therefore be the
primary ob jective of state policy. To achieve a fair distribu tion of the value-added, collective
bargaining and social security fi nanced on a pay-as-you-go basis of solidarity should
be strengthened. In mature economies, the extreme dependence on exports and industry
should be reduced, and ambitious ecological reconstruction alongside (public) work to
help people should be ex panded considerably.
Thirdly, a fair distribution of the economic value-added to those actors who worked
together to create it is not possible without tackling the im balance of economic power in
capitalist compa nies. Those who own the means of production of course cannot make
profi table use of them without employing the labour power of others. As a result, the labour
force has the right to co determination in economic and social matters. The elementary
right to take decisions should belong to an equal extent to employees, share holders
and local authority or social bodies.
Social control of companies is the alternative to control by shareholder value and fi -
nancial inves tors. A capitalism capable of being democratic in a society of equals beyond
fi nancial capitalism is the motto for a global new start, for the good of each and every
one of us.
There are important grounds and respectable models on which to base such a new
start. In 1947, the CDU in the British occupation zone formulated its Ahlen Programme,
following eco nomic collapse and in the midst of social turbu lence. Its preamble states:
‘The capitalist eco nomic system has not done justice to the vital state and social interests
of the German people. The content and objective of the new social and economic order
can no longer be the capitalist striving for profi t and power, but only the wellbe ing of the
people.’
After the peaceful revolution, the fall of the Ber lin Wall and German unifi cation, Pope
John Paul II. asked in 1991: ‘Is capitalism the only victorious economic and social system
which is worthy of the efforts of the transformation coun tries, and which can be recommended
to the developing countries?’ His answer is: ‘A human alternative would be: To
order the market through social forces and organs of the state and to order companies so
99

that they become places of free work and participation. The west ern countries run the
risk of seeing the failure of socialism as the unilateral triumph of their own economic
system, and therefore of not bother ing to undertake the necessary corrections to that
system.’
Fourthly, fi nancial markets should be de globalised. Thus the hegemony of the US dollar
must be replaced by a multilateral currency re gime. Nationally, successful economic
devel opment depends on the existence of micro-banks, which network agricultural companies,
manufacturing industries and companies provid ing service together – in a fi nancial
and coop erative way.
Fifthly, the G20 nations should regulate the fi nancial markets more strictly, so that
the money supply, the stability of the monetary sphere and the function of fi nancial
companies once again becomes a quasi-public good. The international fi nancial structures
thus serve the objective of improving the wellbeing and quality of life of the world’s
population, and especially of the world’s poor.
In a global fi nancial architecture, it follows that all fi nancial services, all fi nancial
companies and all the locations where fi nancial services are demanded and supplied,
must be subject to public supervision and control. The possibilities for banks to create
credit must be tied to strict conditions. To avoid speculative attacks on cur rencies, the
exchange rates of the reserve cur rencies should be stabilised and short-term cash fl ows
should be taxed in a similar way to the movement of goods.
Angela Merkel, the German Chancellor, de clares that the crisis is an opportunity. But
this opportunity cannot amount to restoring fi nancial capitalism. Economic democracy
is the appro priate name for a new political start.
Translation: The Language Technology Centre
This article was also published in the recent issue of Social Europe journal (www.social-europe.eu).
The views expressed in this article are those of the authors and do not necessarily refl ect those of the FES
London.
ViSdP (Person responsible according to the German Press Law): Karl-Heinz Spiegel
100

A PROTECTIVE SHIELD FOR JOBS
Angela Merkel and Peer Steinbrück are rescuing the banks. A protective shield costing
almost EUR 500 billion is supposed to prevent collapse on the fi nancial markets. The shield
is being paid for by taxpayers. So far, so bad.
CONFEDERATION OF GERMAN TRADE UNIONS (DGB) 1
But who is actually protecting jobs from the con sequences of the fi nancial crisis? In
the crisis, the banks are cutting credit lines and demand ing better securities. Credit provision
is being cut back. Interest rates are going up. Investment plans are being postponed.
Different sectors of the economy are affected in varying degrees. Not all sectors are doing
as well as the metal working and electronics industries. Companies there are swimming
in money. High own capital quotas and a high proportion of fi nancial assets protect metal-working
and electronics fi rms from the deterioration in credit conditions. However, in
construction, retail and catering, the starting position is considerably worse.
Since this is a global crisis, Germany, as world champion exporter, is threatened with
losing important sales markets. The British, Irish and Spaniards have already lost their
desire to buy. Now the German economy’s pathological de pendence on exports is coming
home to haunt us. Germany can no longer grow under its own steam. Cash-strapped
consumers are not mak ing up for the sinking demand from abroad. Consumers at home
are feeling insecure be cause of the crisis and spending even less money. Added to this, if
price rises are taken into account, in recent years wages have actu ally fallen.
Even a few short weeks ago, the Chancellor did not see any political need to act to
protect the economy and ensure growth. The red Finance Minister was scornful about
the threat of money going down the tube. Economists were spitting blood. Because according
to neoliberal theories, giving the economy a spending boost produces at best a
fl ash in the pan. Its lasting results are said to be only the ashes of infl ation and new debts.
Just how far divorced from reality this economic fairytale is, is something the prag matic
Anglo-Saxons have been showing us for decades. The Americans and British, with their
active monetary and fi nancial policies, are achieving high growth rates and at times full
employment. In Germany this is being totally ig nored. German autism is reminiscent of
a Beatles hit from the 1970s. “Nothing’s gonna change my world”, the long-haired ones
sang in those days. True to the motto: If it shouldn’t be so, then it can’t be so.
However, a “policy of the steady hand” will in the end cost us dear. Production and
demand are collapsing like a house of cards. The eco nomic downturn is thus becoming
deeper and will last longer. Our republic can tell you a thing or two about that: A
downturn at home lasts on average for 28 tough months. In the USA it lasts for only
11 months. But every additional month of the growth and labour market crisis means
millions in lost taxes and contributions. Stein brück’s dreams of balancing his budget
are van ishing into thin air.
It doesn’t have to get that far, if only we take off our ideological blinkers in time.
Beyond our na tional borders, a great deal of work has gone into designing successful
1 This article was fi rst published by the Confederation of German Trade Unions (DGB), Federal
Executive, Economic and Fiscal Policy Department, in the Standpunkt, no.3, 22 nd October 2008.
101

programmes to boost the economy and growth. We should now learn from these experiences.
The fi rst step must be a quick injection of liquidity into the economy. It must come
into effect before a wave of pessi mism buries everything in its wake.
Furthermore, the dose has to be suffi cient. It should be one per cent of GDP if we
really want to stand up to the forces of the downturn suc cessfully. That is round about
the size of the latest American economic programme – around US$ 160 billion – which
was put into effect this spring. So for Germany this would mean a package of about EUR
25 billion.
The next crucial question is how best to get the economy going again. Should central
and state governments and local authorities spend more, or should there be tax cuts for
everybody? The lesson of the past is that higher public expendi ture is more effective that
cutting taxes. Accord ing to an estimate by the Munich ifo Institute, each additional euro
from the coffers of the state increases GDP by EUR 2.40. However, an extra euro taken
off taxes only increases GDP by EUR 1.80. The latest tax cuts of the Bush government
– principally for those on higher in comes – were a classic example of how not to do it.
The stimulus to the economy, only 30 cents for every euro in tax cuts, was minimal.
The public investment gap is another reason for higher state spending. At only 1.5%,
the rate of state investment is about one percentage point lower than the European average.
Greater pub lic investment in education, infrastructure and climate protection in the
future would combine what is socially necessary with what is eco nomically sensible. This
public investment of fensive could be augmented by additional in vestment allowances.
In addition, social transfers could also be raised. A signifi cant increase in the rate
for Hartz IV in come support would give a boost to consump tion. Because low-income
households spend each additional cent they receive immediately. Their rate of savings is
close to zero.
In an open economy, the additional demand would of course not only benefi t German
fi rms. But the largest European economy would thereby at long last take responsibility
for the Single Market. And if Peer Steinbrück would talk to his French, British and Italian
colleagues, this could produce a common European show of strength. Not to mention
energetic support from the guardians of the European currency.
The fact that such a programme produces new debt in the short run is no disaster.
Because one thing is certain: The longer the downturn lasts, the larger the debt mountain
will become. In addition, the economic package will to a great extent pay for itself
through its positive effects on growth and the labour market. The German central bank
estimates the self-fi nancing share at 50%. And higher public investment should in the
medium term be fi nanced from taxes any way. However, anyone who wants to run up as
few debts as possible could also use part of the gold reserves. About EUR 50 billion of
gold is lying around uselessly in the cellars of Ger many’s central bankers.
However, the worst thing the politicians could do would be to sit back and do nothing.
When sup plemented with large wage increases, higher public expenditure can get
the growth engine of the economy started again.
Translation: The Language Technology Centre
The views expressed in this article are those of the author and do not necessarily refl ect those of the FES
London.
A German-language version of this article is available on
http://www.aktionintern.de/publikationen/standpu nkt/data/standpunkt_3_2008.pdf
102

time and temporary employment, while the share of all non-regular workers amounted to
35 percent in 2007. The KLSI esti mate is as high as 55 percent of the workforce. 1
In Germany too, statistical defi nitions and empirical estimates of „atypical employment“
vary. According to the Hans-Böckler-Stiftung its share amounts to approximately
30 percent of wage earners. The following diagram presents an estimate of different types
of irregular employment in East and West Germany.
The surge of atypical employment is closely linked to the conditions of the labour
market, in particular the fast rising levels of unemployment. It is also linked to the shrinkage
of “Ford ist” large-scale mass production, the outsourcing strategies of fi rms and, of
course, the de regulation and fl exibilisation of labour markets. Furthermore, labour offi
ces have been putting more and more pressure on the unemployed to accept just about
any job, often well below their qualifi cations and experience and meagre pay.
One important consequence of all these changes was the increase in the number
of the work ing poor and of the poor in general, of the “Prekariat”, as it has come to be
called in Germany. Women and young people are particularly affected by it. There is a
rising number of working poor among people with regular work too. Thus, disparities of
income and in regional devel opment have increased considerably over the years.
We will fi rst present different types of atypical employment prevalent in Germany.
In section II., some comments will be added on the effects of these changes on incomes
and society. Finally, some refl ections will be offered on the underlying causes of these
phenomena and on the workings of the economic system, that generates them.
104
I. FORMS OF ATYPICAL EMPLOYMENT
The evolution of atypical employment has to seen in the context of 30 years of rising
unem ployment in Germany. In recent years, the number of wage earners amounted to
approxi mately 35 million. The year in which unemployed peaked was 2005 with 4.9 million.
2 The research institute IAB of the Labour Offi ce calculated an employment gap of 7
million for the same year. 3
The job gap can be estimated too by using the work volume in the German economy.
Inciden tally, the total volume of hours worked was the same in 1960 and in 2007, about 56
billion hours. In 1960, the potential total work force was 27 million. It grew to 44 million
in 2007. That means that there are 44 million people available nowadays to do the same
amount work ing hours as formerly 27 million people. Luckily, Germans nowadays do not
work on week ends and take 30 holidays a year (God bless the labour unions). Yet, taking
into account a work load of less than 1400 hours a year, there remains a huge gap of 25
percent: “According to the perspective one prefers to adopt, either 25 percent of the potential
workforce is super fl uous, or the work volume available falls short by 25 percent.” 4 This
is precisely the gap, in which the atypical workers, the under- and the unemployed try to
meek out a living.
1 Kim Yoo-soon, Working Korea 2007, Korea Labour and Society Institute, p. 32.
2 Since then it has fallen to 3.8 million (average 2007).
3 Bundesagentur für Arbeit, Arbeitsmarkt 2005, in: Amtliche Nachrichten, Sondernummer
2006, S. 68.
4 J. Melz, L. Niggemeyer, Sieben Millionen ohne Arbeit, Blätter für deutsche und internationale
Politik 11/2007, 1289-92.

1. Part-time work
Whereas in Korea part-time work is seen quite negatively, in Germany many people
fi nd part-time work quite acceptable and even desirable, particularly young families and
people aiming for academic degrees. In the Netherlands, it is quite normal that both husband
and wife work part-time and share the household chores between them. Part-time
work are not considered second-class workers. What matters is that payment is fair and
that social security contribu tions are paid. That said, it is quite clear too that part-time
jobs often are not paid well, even when social security contributions are covered. Just as
in Korea, part-time work in Germany is female, working conditions tend to be rough and
job satisfaction low. Often people work part-time because there are no opportunities to
work full-time, in particular in East Germany. More than 1,7 million part-timers in 2005
would have preferred to work full-time. 5
Part-time work increased rapidly in recent years. In 1969, 16.2 percent of the economically
active population were in this category; by 2006, it had risen to 25,2 percent (Eurostat).
These fi gures include mini- and midi-jobs (see below). The increase was particularly
severe in East Germany (from 6 to 23 percent). Surprisingly, part-time work is more common
among people on public payrolls than in the private sector (21 vs. 27 percent). 6
2. Temporary work through work agency (Leiharbeit or Zeitarbeit)
Intended to make labour markets more fl exible, labour contracts by means of a third
party (agency) relieve the contracting fi rm from many legal obligations and give it maximum
fl exibility in the use of labour. The agency “rents out” labour for a defi nite period,
pays the worker and keeps for itself part of what it receives from the contracting fi rms
(often in the order of 50 percent).
The number of agency workers has notably increased in recent years (see graph). In
2006, 60 percent of fi rms with more than 5000 and 45 percent of fi rms with more than
250 employees reported to employ such personnel. 7
5 Statistisches Bundesamt, Mikrozensus 2005, Bevölkerung und Erwerbstätigkeit, Bd. 2, 2006.
Mikrozensus 2005; according to Melz et al., p. 1291.
6 Ahlers, Elke (2004), Beschäftigungskrise im öffentlichen Dienst, WSI-Mitteilungen 2/2004.
7 Stefanie Hürtgen, Prekariat als Normalität, Blätter …, 4/2008, p. 114 (acc. to IAT-Report, 3/2006)
105

Politically, it was argued that Leiharbeit would be a springboard into regular work.
This how ever is not borne out by reality: Less than 8 percent of the Leiharbeiter found
non-agency work after such a job. 8
106
3. Defi nite-time contract
Regular employment is characterised by indefi nite contracts, which do not stipulate
a time limit of employment. After 6 months, workers enjoy rather stringent protection
against dis missal (certain levels of such protection exist right after taking up employment).
After having been with the same employer for fi ve years, workers enjoy a level of
job security similar to public employees. This sort of labour market infl exibility affords
security to workers, yet is not much appreciated by private fi rms and the government (!)
in their role as an employer. They prefer defi nite-time contracts of short duration, which
allow high levels of fl exibility. As unemployment is high, this is what labour market conditions
increasingly permit.
8 percent of employees in the private sector had a temporary contract in 2004. The
public sector did even “better” with 10 percent. 9 In 1991, 80 percent of all new contracts
were in defi nite contracts. In 2003, roughly 56 percent of all new contracts stipulated a
time limit. In particular, young people are in a dire situation. Thus, job security has decreased
signifi cantly.
4. “Marginal” employment (geringfügige Beschäftigung)
* mini-jobs with payment up to 400-Euro per month
Incomes up to this level are paid out in full; no income tax and no social security
contribu tions are withheld. Instead, the employer has to pay 30.1 percent of the wage
sum as social security contributions (in case of household services 13.7 percent). The
worker cannot claim benefi ts out of these contributions (most likely he or she has health
insurance through other channels). However, if the worker makes co-payments to the
public old-age insurance, both the employer’s and the workers contribution will be credited
to his or her pension account.
In 2004, there were 4,5 million people relying only on one or several mini-jobs. There
were another 1,4 million with a mini-job as a side-job.
8 IAB, 2006, according to Hans-Böckler-Stiftung, 2006.
9 Ahlers, Elke (2004), Beschäftigungskrise im öffentlichen Dienst, WSI-Mitteilungen 2/2004.

* midi-jobs (income between 400 and 800 Euro per month)
There are similar arrangements for social security con tributions as with mini-jobs. In
2004, there were about 670000 persons in this cate gory.
* short-term employment (kurzfristige Beschäftigung)
The difference to mini- and midi-jobs is that is limited to two months or 50 days per
year. No payments for social insurance are required.
The growth of marginal employment is quite remarkable (see graph). It has been shown
repeatedly that many full-time jobs were replaced by such „marginal“ jobs. In the Internet
there are plenty of sites emphasizing the reduced costs and the fl exibility in the use of such
labour. Even semi-offi cial chambers of commerce promote such arrangements.
5. One-Euro jobs
The term “One-Euro Job” has caught the attention of the German media. It is one of
the best-known neologisms in recent year. This is so because it appears to run counter to
all notions of just pay and social justice. In fact, it is a program for persons on the new
public assistance program (Type-Two Unemployment Benefi t; Arbeitslosengeld II). Its intention
is to give an incentive to the long-term unemployed to look for work. Without a
reduction of benefi ts they can earn between one to two Euros per hour.
There is much coming and going in these jobs. In November 2007, around 323000
persons were on a one-Euro job. Statistically, they are not counted as unemployed (which
was one reason why this program was introduced). In theory, only works in the public
interest are al lowed. In fact, there are numerous complaints that regular workers were
dismissed and re placed by one-Euro jobs (for instance, in old-age care).
6. Short-time work (Kurzarbeit)
In case a fi rm gets into unexpected diffi culties, it can, in agreement with the worker’s
council, apply for short-time work at the employment offi ce. The latter will pay the difference
to the former monthly income. This program has been in place for construction
workers for many years. In the process of German unifi cation, it was widely used in all
branches of industry. At that time up to 2 million persons were on Kurzarbeit. In recent
years, their number ascended to 70-150 thousand workers only.
7. ABM Program (Arbeitsbeschaffungsmaßnahmen)
This is one of the oldest programs intended to prepare the way for the unemployed
into the labour market by offering them work in the public interest and by providing
them with a de cent income. Highly qualifi ed people too benefi tted from this program.
For example, a friend with a doctorate in German literature, ordered the archive and the
literary inheritance of Heinrich Böll after the latter’s death with the support of the ABM
program. Before, several hundred thousand people benefi tted from the ABM program.
Nowadays, mostly for the rise of One-Euro jobs, less than 50000 persons are on it.
8. Internships
Because of the diffi culties of fi nding employment after graduation, students and university
graduates frequently undergo internships to improve their chances to get a job.
107

Internships are meant for training, yet they often involve regular working tasks. Payment
is normally below living costs and often enough nil. Most of them depend on their
parents’ support and their own savings during internships. It has been shown that 36
percent of university graduates do more than 5, 59 percent more than 3 internships. 10
108
9. Pseudo self-employment
In this category, we fi nd people who in their appearance are independent entrepreneurs,
but in reality do typical wage earners’ work, predominantly for just one fi rm. They
are normally subject to the orders of this fi rm. Furthermore, many do not have any capital
of their own. Pseudo self-employment is often associated to outsourcing strategies
of fi rms. The basic ad vantage for these fi rms is that they do not have to shoulder social
security contributions, which in Germany amount to roughly 40 percent of gross wages.
The IAB (the research insti tute of the Federal Labour Offi ce) estimated that there were
180-430 thousand dependent and more than 200 thousand semi-dependent pseudo selfemployed
in Germany in 1995. 11 In spite of better legal provisions and surveillance, their
number is bound to have increased since then.
10. Grey Labour Market (underground economy)
Estimates on the size and importance of the grey labour market vary greatly (pseudo
self-employment one way or the other is part of the grey labour market). By its very nature,
it is hidden from the public eye. Remunerations tend to be considerably lower than
for regular work and social security contributions and income taxes are normally not
paid. Estimates dif fer greatly and run from 1,6 to more than 10 percent of GDP. Accordingly,
it could add up to something like 1-3 million full-time job equivalents.
II. INCOME INEQUALITY AND SOCIAL DIFFERENTIATION
Overall, real wages have not risen much over the past 15 to 20 years, in particular
when the tax burden and social security contributions are taken into account. In contrast,
incomes from capital and wealth increased notably over the same period. At the
same time, the distribution of income among workers has deteriorated. Low incomes are
not only common in atypical employment, but increasingly in regular employment too.
The incomes of 440000 full-time workers in 2004 were so low, that they had to apply for
public assistance. The share of the working poor in total employment was 18,4 percent in
2004. 12 People on part-time work and mini-jobs are particularly bad off (see graph).
Comparing their share in the labour force with their share in low-pay workers, it
becomes quite clear, which social groups suffer most in the labour market. The working
poor are women, East Germans, young and with low levels of qualifi cation (see graph).
10 Björn Böhning et al., Praktika von Hochschulabsolventen. Eine Studie der DGB-Jugend, Februar
2006.
11 Hans Dietrich, Empirische Befunde zur selbständigen Erwerbstätigkeit unter besonderer
Berücksichtigung scheinselbständiger Erwerbsverhältnisse, in: IAB, Mitteilungen aus der Arbeitsmarkt-
und Berufsforschung, 1/1999, S. 85-101.
12 Less than 2/3 of median wage. IAB, 2006.

Especially disadvantaged groups are foreigners and people of
foreign descent, in particular from some Mediterranean countries.
Their eco nomic-activity rate is considerably lower, while
their unemployment rate is twice as high and their rate of parttime
workers slightly higher than the national average. They
are bound to represent an important section of the working
poor in the table above (except among East German workers,
where few foreigner live).
WORKING POOR BY SOCIAL GROUPS
Share in full-time workers Share in low-pay workers*
Women 34,9 % 57,0 %
Young workers to age 24 7,2 % 16,1 %
Workers with
low-level qualifi cations
11,5 % 15,2 %
East German workers 17,6 % 37,8 %
* groups overlap Source: IAB, Hans-Böckler-Stiftung, 2006
One other thing is striking in the German labour market: It
is how badly people are paid in service industry. One might
expect that wages in manufacturing industry, in particular
in the case of Germany with its high export orientation,
were under pressure from world market competition. To the
contrary, German wages in manufacturing are among the
highest in the world, while the country produces ever higher
trade surpluses.
Why should services then be paid so badly? Surely, not
for reasons of international competition, as most services are
geographically bound and therefore not subject to international
wage competition. The answer is of course that wages
are low 1. because of a massive oversupply of labour (itself a
result of the high levels of unemployment), 2. because of the
weakness of labour unions in service industry and 3. because
of the ab sence of a minimum wage legislation in Germany.
One implication of the low wages in service industry is
that people with high incomes (from work or capital) have
the benefi t of cheap services. You could say that the well-off citizens exploit the less welloff
citizens, as the latter are forced to sell their la bour force at unfavourable rates. This is
one aspect of new emerging forms of social differen tiation.
The share of the top 10 percent of German households in national disposable income
was 24 percent in 2002, while the share of the bottom decile was a mere 3 percent. If
the inequality in incomes is bad, the distribution of wealth is worse. The top ten percent
owned 51 percent of real and fi nancial assets, while the net worth of the bottom ten percent
of German households was negative in 2002. 13 Another aspect familiar to Korean
13 Peter Krause, Andrea Schäfer, Verteilung von Vermögen und Einkommen in Deutschland:
Große Unter schiede nach Geschlecht und Alter, in: DIW, Wochenbericht, 11/2005, S. 199-207.
109

eaders is the rising indebtedness of private households. A growing number of them is
unable to service their accumulated debt out of cur rent incomes.
All this shows that the rise of irregular/
atypical em ployment is embedded in
larger economic, social and political
changes, which have lead to an ever
more differentiated society far removed
from the highly homogenous German
social formation of the 1950s and 1960s.
Social polarisation has increased notably;
the socalled middle classes have
shrunk and society and politics have become
much more heterogeneous. The
following diagram depicts present day
German society in terms of individual
dispositions and social and political inclinations.
As a result, it has become
practically impossible for political parties in Germany to organize a political consensus
among the electorate and to gain clear majorities for government policies.
110
West and East Germany
Even on the most pressing problems of the labour market, government policies are
not com prehensive, coherent and effective. The rigidities involved in political and institutional
inter dependencies and the multiplicity of political interests and of well-organised
and institutional ised private actors (employers’ associations and lobbyists) have become
major obstacles to “rational” effective policy-making in Germany. 14
14 A problem analysed a long time ago by Fritz Scharpf as “Politikverfl echtungsfalle”.

In contrast, the preferences of German citizens are absolutely clear 15 :
* 78 percent say that working contracts on principle ought to be indefi nite. Defi nitetime
contracts should be allowed under exceptional circumstances only.
* 72 percent say that contract work through agencies (Zeitarbeit) should be restricted.
* 70 percent say that there should be limit to the differences in incomes.
What people want is work, good, modern, respected work. Work is the basis of human
dig nity: Work is one’s contribution to society and it is the proof that one is needed.
The grain of German policymaking clearly has gone against the revealed preferences
of the citizens for many years. The outcomes are quite worrisome in terms of the evolution
of soci ety and politics. In a number of other countries outcomes are similar. In some
countries, like Sweden and Denmark, where different sets of policies were followed, many
of the negative outcomes were avoided. In the Scandinavian economies, participation rates
are high, unem ployment low, the private and public service sector large, the welfare state
intact and with wide popular support, while government budgets are in surplus, growth
rates are high and innovation strong. What went wrong in the German case?
III. ANALYSIS
Many labour market economists believe that there exists a trade-off between the levels
of employment on the one hand, and the level of wages and welfare. Roughly speaking,
German labour and employment policies followed this paradigm, making labour more
“employable” by reducing labour costs and “fl exibilising” the labour market. This sort of
policies is advo cated by the OECD. Surprisingly, this organization gave much higher marks
to Germany for its efforts to fl exibilise its labour markets than “market-liberal” Great Britain.
Yet, in spite of hard-won German efforts, outcomes in terms of growth rates and the
reduction of unemployment were defi nitely better in Britain than in Germany.
15 Initiative “Neue Qualität der Arbeit”, INQA-Bericht Nr. 19, 2006.
111

112

As a result of such policies and in combination with other policy mistakes, the situation
in the labour market became ever worse: structural unemployment became endemic,
wages did not grow, while the tax burden for labour and the inequality in incomes wealth
increased, and ever more private households were unable to pay their fast rising debts.
Furthermore, social security systems and state fi nances got on slippery slopes, while
public and private invest ment trailed far behind most other OECD countries – in spite of
fast rising profi ts.
The outcomes of these policies were quite unpalatable. If the labour market policies had
been implemented on a trial-and-error basis, surely this horror could have been stopped
in time. Instead, economists and politicians opined that not enough of that medicine had
been given. Thus, the German economy got onto a vicious circle of self-fulfi lling diagnoses
of a lack of fl exibility of labour, unions and labour markets, labour laws and so on.
What went wrong in Germany?
Since the early 1980s German governments pursued policies to increase the “employability”
labour. On the one hand, the indirect costs of labour (social security contributions,
fringe benefi ts) were lowered, in particular for employers; on the other, labour market
fl exibility was increased, while real labour incomes were actually lowered. Because of
the relaxation of legal restrictions, atypical employment expanded. The government even
allowed fi rms to opt out of the famous dual system of technical education. For example,
in 2004 only 43 percent of the applying youths could obtain an apprenticeship position,
while 39.5 percent entered so-called transitional programs of the Federal Agency of Labour
– and, as a result, will not be able to obtain a “skilled crafts certifi cate”!
Another pseudo labour market policy was early retirement. Millions were sent into
early re tirement long before their 65 th birthday – at a huge cost to the social security systems
and the taxpayer. However, for the private and public employers early retirement
was an enormous gain, as they could get rid of the more costly elderly workers, while
they were under no obli gation to give employment to the young. Naturally, at the macroeconomic
level, it was a self-defeating policy because household incomes and demand
were lowered by these and most of the other labour policies as well. On top of all that, the
social security systems were abused for fi nancing German unifi cation.
Because of these policies and because the growth of wages stayed behind productivity
growth and even below infl ation rates, internal demand was weak. This stands in stark
contrast to the 1950s and 1960s. Then, the mechanism was the engine of growth and innovation
of the Ger man economy: Fast rising labour costs forced enterprises to invest in
order to increase pro ductivity – and thus profi ts and wages could increase. At that time,
net investment of the manufacturing sector alone was in the order of 9-15 percent of
GDP. Since the early 1980s this net investment rate fell 0.7-1,5 percent of GDP, and was
even negative in some years.
Politically speaking, the investment-productivity-wage mechanism formed the core of
the productivity pact of trilateral corporatism – State, employers and unions – in Germany.
Un surprisingly, under the new policy priorities, the low investment levels and the weakened
la bour union movement, it could not survive (more on this later).
Macro-economic policies were just as dogmatic as labour market policies. The Bundesbank’s
main concern was infl ation, even at statistically overestimated rates of nominally
2 percent. Against all evidence, it continued to try to control monetary aggregates.
113

Interest rates were too high and money supply to small to support economic expansion.
In addition, the Bundes bank killed the post-unifi cation boom of 1990/92. Fiscal policies
were equally restrictive, not least for the EU Growth and Stability Pact, which was signed
at German insistence in tandem with the introduction of the Euro.
The effects of repressed wages and incomes of private households, of low levels of
invest ment and of restrictive fi scal and monetary policies were so severe that the German
economy even trailed behind the other EU economies, not to speak of the US economy,
which followed expansionary fi scal and monetary policies all along since 1982. In Germany,
only export de mand showed some dynamism: this was the result of falling unit
labour costs, which in creased German competitiveness within the Euro area and beyond
(see graph).
As a result, the German economy generated
in most of the past 25 years current
account surpluses of up to 7 percent of
GDP (except for some years after German
unifi cation). This will sound very familiar
to South Korean readers, because this
country has been following the same policy
set since the IMF crisis. Against the
weakness of internal demand, the low
levels of investment and restrictive fi scal
and monetary policies, the economy can
only gain some dynamism through an
ever-increasing export orien tation. On
the other hand, because internal savings
are higher than internal investment, capital
is exported to defi cit countries, basically
the US. In other words, countries like Korea and Germany (plus Japan, Taiwan, China
etc.) lend their excess savings to countries with a sav ings defi cit. They compensate their
own under-consumption by lending their excess savings to countries, which over-consume
and do not save suffi ciently. Saving surplus countries like Germany and Korea hand out
money to the defi cit countries, with which they by the formers’ goods.
As we cannot be sure at all that we will get our money back (by default or devaluation),
this is a very shortsighted way to stimulate an economy. Quite obviously, it would
make much more sense to stimulate our own economies instead of giving others the
money to buy our goods. There is the rub: Such a strategy would involve the stimulation
of internal demand through increases in real wages, as well as fi scal and monetary policies.
Even wage increases above productivity growth would be useful – as they set into
action the above mentioned invest ment-productivity-wage mechanism.
The world macro-economic analysis presented here is not in dispute. It is part of the
regular diet of the readers the Financial Times and the Economist among others. To get
out of the present turmoil of the US economy, it is clear that policies as delineated above
will have to be implemented in surplus countries like Korea and Germany. Yet, why is it
that such and other reasonable strategies are only discussed in times of a crisis? Why did
they not become part of public discourse much earlier?
Answers will vary, while it surely is not easy to puzzle together all the pieces of the
picture. Some pieces come to mind easily. Media-society and medio-democracy require
114

that issues refl ect fundamental beliefs and attitudes, that they are staged and packed into
emotional, if not anxiety-arousing language and slogans. The media work through fi lters
that distort and exclude reality. Democracy and neo-liberal ideology function as civil religions.
Media Tsars have their own political agendas. The common weal has disappeared
practically from public discourse. The hegemonic neo-liberal discourse put the consumer
into the place of the autonomous citizen of political liberalism. Profi ts are perceived as
a reward for consumer satisfaction. Yet, in reality, as we have seen, it is the consumer in
the form of its alter ego as a worker, who has had to bear an unproportionate economic
burden, while the owners of capital have experienced fast rising incomes, even at historically
very low investment levels.
For example, in German public discourse one constantly repeated theme is the endangered
competitiveness of the German enterprises on the world market. At the same
time, just like in Korea, huge export surpluses are celebrated. Yet, the glaring contradiction
between the two themes is entirely ignored by the German employers’ federations,
the media, politicians and bureaucrats. The fears and anxieties associated with globalisation
have overpowered the strengths of the German economy and eliminated them from
public consciousness. At the same time, globalisation fears are an essential moment in
neo-liberal discourse and serve as a justifi cation for repressive wage and labour market
fl exibilisation policies. For politicians and bureaucrats, globalisation is a wonderful cover
for unsavoury policies and for policy failures. Finally, fears and blaming other countries
(and foreigners for that) for whatever problem, is one of the easiest ways to survive in
medio-democracy.
There is another reason for the emergence of neo-liberal discourse over the past 20
or 30 years. The end of the Cold War. The logic of the Cold War implied that West Germany
had to be at least as successful as East Germany in terms of social justice and
social achievements. Therefore, all German parties were essentially social democratic in
their policy aspirations (Ralf Dahrendorf). Yet, the Cold War framework began to weaken
with the Cuban missile crisis in 1962. From then on, the East-West confrontation was
transformed into status-quo and later “engagement” politics and eventually ended in the
disintegration of the Soviet Union and the Eastern Block. As a result, the idea of social
justice and social inclusion lost much of its sway. In addition, the labour union movement
was weakened by the oil crises and rising un employment. In parallel, employers’ and
capital owners were strengthened, not least by the emerging neo-liberal discourse, which
rapidly occupied a hegemonic position in most ad vanced economies (and beyond under
the heavy-weight umbrella of the Washington Consen sus).
In Germany, the loosening of the Cold-War framework eroded the tripartite corporatist
con sensus building among State, employers and unions. With the demise of tripartism,
bipartite corporatism – State and capital owners/employers against the weakened labour
movement – emerged. It is an integral part of the new hegemonic discourse. Bipartite
corporatism is fl ex ing its muscles against the century-old tradition of the Social Welfare
State. For instance, “Gesamtmetall”, the Federation of Metal and Electrical Industry, has
been pushing the so-called “Initiative New Social Market Economy”, which is nothing
less than an all out and deceptive PR-campaign against the Social Welfare State.
115

116
IV. CONCLUSION
– Full employment stopped to be even a rhetoric aim in the course of the 1980s.
– The unemployed and unqualifi ed had to blame themselves for their mishap. They
became brandished as bad consumers, a fi nancial burden and simply superfl uous.
– Globalisation became an all out justifi cation for policymaking and policy failure in
public discourse.
– The primary aim of education has become “human” resource development. Effi ciency
and Leistungsträger (high achievers able to bear the competitive challenges) are the
catch words. Only the best and the brightest count. Never mind that between 7 and
13,7 percent of German children do not fi nish 9 years of compulsory education successfully.
– Social disintegration and polarisation are the results. The lower the incomes in the
mar ginalised sector, the lower unemployment and public assistance rates are set – in
order not to give incentives for idleness. Nowadays, the unemployed are forced to accept
almost any job (there have been cases of women being sent to work in brothels;
prostitution was le galized as a normal business in 2002).
– Mismatches in the labour market are, if at all, a matter of passive labour market
policies. What appears as active labour market policy, is little more than a cosmetic
attempt to re duce the number of unemployed for the monthly statistics and a way to
provide enterprises with a selected few, who have gone through multiple training.
This is very different from what is happening in Sweden: There, the general proposition
is that
“it is essential to develop the productive capacities of the wage earners because they are
central to productivity and adaptation processes. Labour market schemes had to be implemented
that would support the individual worker and reallocate labour and investment from less to more
productive parts of the economy.” 16
It goes without saying that this is a tripartite task in Sweden and that both social
partners and the State defend it. As a result, Sweden spends much more money on active
labour market policies than Germany. The results are palpable.
German bipartite corporatism’s care for social justice and cohesion is little more than
decep tive rhetoric. Instead, it fosters the growth of an underclass in precarious economic
conditions in Germany. Whatever aspect of the German “atypical” employment one looks
at, in a com parative perspective, it is quite clear where our failures lie: In the lack of a
comprehensive, human and humane view of the unemployment and under-qualifi cation
problems and in the lack of a proper conceptualisation of these problems and of labour
market schemes. As the world enters a deep economic and fi nancial crisis, it is urgent to
deconstruct the hegemonic neo-liberal discourses, reconstruct our micro- and macro-economic
policymaking and put them on a fi rm footing in historical and conceptual terms.
Summary
Just as in Korea, non-regular employment is on the increase in Germany. Part-time
workers make up an important part of “atypical” (the German term) employment in both
16 Lars Magnusson, The Swedish Labour Market Model in a Globalised World, Friedrich Ebert
Stiftung, Stock holm, 2007, p. 3.

countries. Yet, in Germany part-timers are not considered as second-class workers. Many
people fi nd it desirable to work part-time. There are other forms of atypical employment
too, among them some that only exist in Germany for institutional and legal reasons.
Atypical employment in Germany has contributed signifi cantly to income inequality
and so cial differentiation. People in atypical employment form a large part of the layer
of the work ing poor. Yet, an increasing number of full-time workers also belong to this
group. The eco nomic and social differentiation is part of larger processes, which began
in the1970s with the oil crises and the weakening of the constraints imposed by the Cold
War. The relations of power in the economy and in society were profoundly affected
by these changes. At the same time neo-liberal ideology gained prominence in public
discourse and academic debate. Against this background, the rise of media-democracy
altered the perception of reality, the nature of political discourse and political decision
taking. By giving prominence to anxieties about globalisation, the interests of the working
population and society were largely ignored, while shortsighted and unsustainable
economic policies were pursued. As a result, we are entering a period of a deep crisis
of the world economy – at a time when social coherence is weaker and partisan politics
more notorious then ever after the end of World War II.
117

118
THE LOW WAGE DEBATE IN GERMANY: ARE THERE
WAYS OUT OF THE POVERTY TRAP?
Michael Dauderstädt 1
This article authored by Michael Dauderstädt was originally published by Friedrich-
Ebert-Stiftung, London Offi ce, London, 2007
Germany is debating how to restructure its low wage sector. Yet, no body should expect employment
miracles from these reforms; they are more about making German society more decent
and just. Not even the best labour market reforms can replace a proactive employment policy.
For many years, Germany has seen an in crease not only of long-term unemploy ment,
predominantly amongst those with low skill levels, but also of the extent of low-wage
employment. The idea of the social state enshrined in Germany’s constitution as well as
economic reason call for em ployment and labour-market policies that combine the wise
utilization of the employ ment potential with decent wages and sala ries.
FULL EMPLOYMENT THROUGH WAGE DISPERSION?
Lasting mass unemployment is obviously the core economic and social problem in
Germany. Neoclassical economics used to offer a simple diagnosis and therapy whereby
unemployment happens if and when there is a gap between the wage expectations of
the unemployed and the pro ductivity expectations of the employers, i.e. if and when the
claimed wages are too high, whereas the envisaged productivity is too low, primarily as
a result of low or out dated qualifi cations. The solution would be – so the neoclassical approach
implies – lower wages and, at the very best, qualifi ca tion updates to be achieved
in the medium-term. These theoretical explanations were often underpinned empirically
by references to the USA and Great Britain where the wage dispersion is said to be higher
and therefore unemployment lower, whereas in Germany the wage dispersion is lower,
but unemployment higher, as a consequence of high standards of social security and
strong trade unions.
As plausible as this simplistic explanation appears to be at fi rst glance, upon more
thorough examination the underlying theo retical assumptions and the empirically measurable
facts turn out to be defi cient. A worker’s productivity is largely dependent on demand.
Physical productivity (out put/working hours) depends on the capital stock used,
with any investment only being worthwhile if there is suffi cient demand. The decisive
monetary productivity (added value/working hours) depends on the prices that are themselves
dependent on demand. Here is an example: if the price for wood goes up as a re-
1 Michael Dauderstädt is Director of the FES Division for Economic and Social Policy.
He wishes to thank the department for economic and social policy at FES as well as the Speakers
of the “Kocherler Kreis” from the 5-7January 2007, whose lectures and contributions have infl uenced
and enriched this paper.

sult of high oil prices, then the woodcutter’s productivity would rise as well. In such case,
it would be worthwhile to invest in the capital equipment of his job (power saw instead
of axe) and thereby to increase the physical productivity as well as to employ a basically
worse woodcutter (with a lower physical productivity) at normal wage level or an equally
productive woodcutter at a higher wage level. 2 But the empirical data also tell a different
story: Scandinavian countries enjoy higher em ployment rates and lower unemployment
fi gures despite (?) strong welfare states and trade unions and an accordingly narrow wage
dispersion. The wage dispersion in the USA or in Great Britain is incidentally not considerably
wider than in Germany and is probably only a refl ection of a wider dispersion of
qualifi cations amongst the working population. What is probably re sponsible for the low
wages at the bottom end is rather the supply pressure that is caused by mass unemployment
than supposed equilibrium between marginal productivity and the market wage.
THE GERMAN LOW WAGE SECTOR
There is already a large low-wage sector in Germany that has considerably increased
since the late 1990s, primarily in eastern Germany. 19% of all persons in full-time employment
are on low wages, if one de fi nes two thirds of the average wage as the low-wage
threshold (i.e. € 1,637 gross per month). Whereas the percentage is 14.9% in the West,
the East has a rate of 36%, i.e. more than double. If, however, the thresh old values are
calculated separately, these two percentage fi gures are again much closer to each other. If
part-time employees and those working only few hours are taken into account, then this
rate goes up further, although it includes -albeit to a limited ex tent -employees earning
relatively high wages, but working few hours. 3
But the expansion of the low-wage sector in Germany and the increasing wage
disper sion associated with it 4 have by no means resulted in the hoped-for decrease of unemployment.
If the short economic upswing around 2001 is disregarded, then employ ment
failed to increase in Germany be tween 1998 and 2004. Primarily the propor tion of the longterm
unemployed and par ticularly of those with low skill levels contin ued to rise. It was not
so much in the sector of regular employment requiring full social contributions that new
jobs were created by hiring so far unemployed people, but rather in the area of subsidized
part-time employ ment (mini-jobs etc.) which triggered the debate to which degree the latter
jobs had replaced regular or informal employment. What is noticeable within the group
of mini-job employees is the high proportion of housewives, pensioners and students who
usually do not form part of the group of em ployees with low skill levels.
Labour-market and social policies since 1989 have, if anything supported this trend.
The reunifi cation strategy pursued by the Kohl administration initially put a massive
burden upon the social-security systems by straining them with the costs incurred by
German reunifi cation. Unemployment in surance, whose insurance component funded
2 Until 1990, German Enterprises made just such in vestments in order to increase the productivity
of low-skilled workers (See Winfried Koeniger und Marco Leonardi „Wage Inequality, investment
and skills“ in Economic Policy, January 2007, S. 72-116)
3 See Presentation Walwei (http://fesportal.fes.de/ pls/portal30/docs/FOLDER/BERATUNG-
SZEN-RUM /WIPO/Kochel/2007/walwei.ppt) and Gerhard Bosch /Claudia Weinkopf „Gesetzliche
Mindestlöhne auch in Deutschland?“ FES Bonn 2006.
4 See Ronald Schettkat „Lohnspreizung: Mythen und Fakten“ HBS Düsseldorf 2006.
119

y contributions had already shown signs of being overstretched by increasing mass
unemployment since 1975, collapsed when it was forced to shoulder the burden of the
exploding eastern German unem ployment and the gradually increasing western German
unemployment. Rising contributions to unemployment insurance increased the
non-wage labour costs. A relative balance between the insurance component funded by
contributions and the social component funded by taxes has only been re-established
from 2007 onwards as a result of the agenda 2010 reforms. But in creasing non-wage labour
costs and easing measures for certain employment types have nevertheless accelerated
the trend moving away from regular employment re quiring full social contributions
towards types of subsidized part-time employment.
120
MODELS FOR RE ORGANIZATION
A number of proposals are currently being discussed that would, however, go beyond
the scope of this short paper. Hence, only a few of the more important ideas of the
Kombi-Lohn (or subsidized wage) and minimum-wage concepts, which represent opposite
views, are to be reviewed here.
• Current Policies: These are made up of a patchwork of specifi c solutions. On the
one hand, they attempt to establish an effective minimum wage through the level of basic
security (unemployment benefi t II 5 ) and through the binding extension of collec tively
negotiated wages (e.g. building indus try). On the other hand, they are designed to make
low-wage jobs more attractive through different types of subsidies. The lat ter include,
inter alia, the partially continued payment of unemployment benefi t II in the event of
employment (additional-earnings practice), job opportunities with compensa tion for additional
expenditure (one-Euro jobs), exemption of mini-jobs from tax and contributions,
a job starter’s bonus, chil dren’s supplement and a progressive in come tax. In addition,
there is a host of re gional Kombi-Lohn schemes, all of which permit income arising from
employment whereby the tax and levies burden is re duced. 6
• Statutory minimum wage: Large sections within the trade unions and the SPD are
in favour of a standard statutory minimum wage of € 7.50 per hour. By way of an alternative,
a lower minimum wage of € 4.50 (as put forward in the Bofi nger-Walwei proposal
explained below) is also being discussed, since many experts ex pect that a high minimum
wage will make employment more diffi cult, especially for persons with low skill
levels (e.g. young people). A scaled collectively negotiated minimum wage, which could
be declared generally binding by a regulation for the af fected industries or regions, could
be an other solution adapted to regional and sec toral labour-market situations.
• Bofi nger-Walwei: The objective of this proposal developed for the government of
Saxony has been to generate an in crease of full-time jobs requiring full social contributions.
Under the proposal, the in centives for part-time employment (oppor tunities to
earn additional income, mini-jobs) are to be abolished or at least re duced. At the same
time, low wages paid on employment resumption are to be ex empt from taxes as well as
from social-benefi t payments in order to decrease the differential between transfer in-
5 Translator’s note: Unemployment benefi t II is no longer tied to the former income of the recipient,
but is around the same fl at-rate level as the current social-assistance benefi t.
6 Vgl. Karen Jaehrling / Claudia Weinkopf „Kombilöh ne in Deutschland: neue Wege, alte
Pfade, Irrweg?“ FES Bonn 2006

comes and net wages. A minimum wage of € 4.50 is designed to prevent companies from
pock eting subsidies by simply lowering wages and salaries.
• Eekhoff: The proposal Schaffensdrang 7 (or creative zest) starts from the premise
that the unemployed seek em ployment not merely for a higher income and that there
is an entitlement to state support only to prevent otherwise inevitable poverty. For this
reason, (local) administra tive bodies are to place unemployed people into jobs, without
the employed earning any wages (save for the reimbursement of di rect job-related costs
such as travel ex penses or clothing). This aspect is largely in conformity with the existing
practices of the one-Euro jobs, whereby the employers pay a commission which is to
be negotiated and fi xed according to the expected productivity. The idea is that not only
charity establish ments, but also private enterprises are to act as employers.
• Sachvertändigenrat (the German “Council of Economic Advisers”): This approach,
which has also been suggested in a similar format by Prof. Hans-Werner Sinn of the ifo
Institute of Economic Re search, aims to reduce unemployment benefi t II by 30% and to
make taking up work more attractive by introducing harsher rules for the withdrawal of
transfer pay ments and an insignifi cance threshold. At the same time, 700.000 jobs are
to be of fered in order to prevent a large number of unemployed from dropping into an
other wise predictable poverty.
• CDU/CSU: The existing allowance practice for low incomes under the Code of
Social Law (no more than € 400) is to be tightened up in order to improve the incen tives
to take up a full-time job. It is also planned that low wages (no minimum wage though)
would attract a subsidy (a so-called “job bonus”) over a period of up to three years and
of up to 40% of the gross wage to encourage employment of older (over 50) and younger
(under 25) unemployed per sons.
• Bürgergeld (or citizen’s money)/Basic income: All citizens are to obtain an unconditional
income funded by taxes, which is to replace the majority of the tradi tional
income substitutes (pension, unem ployment benefi t, sickness pay, state wel fare assistance),
at least in the area of ba sic security. High costs, the removal of ac tive support for
professional integration and the lack of incentives to look for work are disadvantages.
PROSPECTS OF RE ORGANIZATION
Any re-organization of the low-wage sector should aim at achieving the following
social and economic-policy objectives:
• Social justice: The earned income of persons in full-time employment should be
above the poverty line and enable those people to live a life that meets the socio cultural
standards in Germany. They should consequently not be forced to disclose other income
they may have or their fi nan cial circumstances. The changeover from jobs not guaranteeing
a secure existence to those guaranteeing a secure existence should be made easier.
• Employment: The obstacles to em ploying people, especially those with low skill
levels, should be reduced by lowering labour costs for potential employers and also by a
noticeable difference between transfer incomes (usually unemployment benefi t II) and
the net wage.
7 Vgl. Vera Bünnagel, Johann Eekhoff und Steffen J. Roth „Mit Schaffensdrang in Arbeit“, VBW
Munich 2006
121

• Prevention of windfall effects: Any conversion of regular employment requiring
full social contributions into types of subsi dized part-time employment should be discouraged.
What should also be avoided is that employment of members of rather wealthy
households (e.g. the husbands or wives of successful self-employed persons, such as
lawyers or physicians, for their work in the joint fi rm) is subsidized.
It is questionable as to whether all three ob jectives can be achieved during a reorganization
of the low-wage sector. In fact, the majority of evaluations indicate rather
modest employment effects. Instead, the focus should be on fi nding policies that make it
easier to achieve the two other ob jectives. In order to do this, the effect of four “wedges”
between the unemployment benefi t and a potential earned income must be diminished;
which enable windfall effects to arise and trigger socially unwanted re sults.
1. “Social-security wedge”: Anybody re ceiving unemployment benefi t II is automatically
registered for social-security pur poses. If and when employment is taken up,
contributions of approx. 20% of the wages become due.
2. “Child wedge”: Anybody receiving un employment benefi t II is automatically entitled
to obtain child benefi ts as well as a supplement of approx. € 54 per child which is no
longer payable, if and when employ ment is taken up.
3. “Housing wedge”: Anybody receiving unemployment benefi t II is automatically
entitled to obtain in full the expenses for reasonable housing. If and when employ ment
is taken up, only a fl at-rate rent sub sidy is payable.
4. “Tax wedge”: This “wedge” is relatively speaking the least problematic, as income
tax is already designed to rise progres sively. An accurately tailored negative in come tax
could overcome these “wedges” which would see objective No. 1 accom plished. As to
the administrative implemen tation, a careful review should take place to establish if
the fi nance, employment or housing-allowance authorities are best equipped to execute
the implementation. In any event, any re-organization needs to go hand-in-hand with
a minimum wage in order to prevent massive tax-funded subsidies to companies with
corresponding substitution effects. The fi scal expenditure will be largely determined by
the level of the mini mum wage. Irrespective of this, the most signifi cant contribution
towards the re organization of the low-wage sector would involve a more successful education
policy that would curb the number of young peo ple with low skill levels who currently
make up about 20% of each year of new job seekers.
122

Religion and Politics in Germany

RELIGION AND POLITICS
Thomas Meyer
This article authored by Thomas Meyer was originally published by Friedrich-Ebert-
Stiftung, Department for Development Policy, Berlin, 2007
ABSTRACT
Religions have made a worldwide political come-back. Apart from personal religious
faith which respects the democratic rule of law, the politicized religion of fundamentalist
claims is undergoing a revival in all cultures and in some places is even making bids for
state power. It also serves as an ideological justifi cation for terrorist violence. In this confusing
situation great and probably lasting damage has been done by the ideologically
inspired thesis of an inevitable clash of civilizations, with which Samuel P. Huntington has
attempted to reduce the wide variety of new religious and cultural phenomena to a single
concept. Huntington’s concept is, however, far too crude and empirically unfounded.
In recent decades the world has witnessed quite different facts. They include the basic
rights covenants of the United Nations of 1966, which were ratifi ed by numerous countries
and represent all the world’s major religions, and above all an internal differentiation into
various currents and political tendencies to be observed at present in all traditional religious
cultures. Empirical research confi rms that in all the world’s religions there are larger or smaller
groups of people who interpret the religious tradition they are committed to in a particular
way: namely that peaceful co-existence and active co-operation with other religions is a selfevident
duty. They regard the basic social and political values which they associate with their
religion as recognizing the equality of all philosophical, cultural and religious identities, so
long as they also accept the principle of the mutual recognition of all. 1
With regard to the future relationship between religion and politics there are two
contradictory tendencies or options: political co-operation between religious and cultural
traditions, on the one hand, and a fundamentalist policy of confl ict, on the other. The
prospects of success for these two opposing options will be determined by a large and
indeterminate number of actors operating in different spheres. They include states and
transnational institutions, parties, civil societies, religious communities and, above all,
the mass media. Thanks to globalization and the electronic mass media, interaction between
the national, regional and global arenas is close and direct.
Holding out the prospect of success in containing the fundamentalist temptation is a
policy of recognition that would combine a declaration of the equal value of every religious
identity – so long as it shows equal respect for all others – with a commitment to fair access
for all to the social and economic resources of world society. Only if we manage to effectively
implement at all political levels the fair and equal treatment of members of all religions and
cultures through successful educational, social and economic policies, will it prove possible
to contain fundamentalism on a lasting basis and turn the renaissance of religion to the advantage
of world society. The political come-back of religion requires a co-operative policy of
recognition in each individual society, in the various regions, and in the global arena.
1 Martin E. Marty / R. Scott Appleby (eds.): Fundamentalisms Observed. Chicago 1991.
125

126
I. A RENAISSANCE OF RELIGIONS?
I.1 Events and developments
A total of fi ve very different developments in recent years have drawn public attention
to the relationship between religion and politics in a new way in many countries of
the world – both in the member states of the European Union and in the global arena:
Firstly: The setting up of a modern theocracy in Iran by Islamic fundamentalists led
by Ayatollah Khomeini in 1979 seemed to show that the newly emerging religious fundamentalism
was not only making headway in the world, but under certain conditions
could successfully bid for political power.
Secondly: The attacks on New York’s World Trade Centre on 11 September 2001 by
Islamist fanatics were a drastic demonstration to the world of the dangers of globalization
in the form of a religious-based political terrorism.
Thirdly: Observing this and other events convinced many commentators, politicians
and scholars that the religious and cultural factor was in the process of becoming a powerful
infl uence in the political arenas of the globalized world.
Fourthly: Many countries of the world, especially in Europe, are witnessing a revival of
religious faith and religion not only in people’s private lives, but also in the public sphere.
Fifthly: Isolated, but spectacular acts of violence and rioting by migrants in several
European countries, widely believed by sections of the public to be religiously motivated,
have reframed the question of the prerequisites and limits of peaceful co-existence between
different religious and cultural communities in today’s world.
It is clear that religions have made a worldwide political come-back at the beginning of
the 21 st century in a way that is in some respects surprising. Those most surprised by this
rebirth of religion were those who assumed that a linear and one-dimensional worldwide
trend towards secularization was an inevitable result of advancing modernization. The associated
expectation that religion – not only as a political factor, but also on the personal
level – was in steady and irreversible recession worldwide now seems to be refuted by this
new development for the time being. The surprise felt by many observers is accompanied
by bewilderment, if not downright fears for the future of the modern world.
I.2 Contradictory development
A differentiated look needs to be taken at this new development, however. The ways
in which specifi c religions re-enter the political arena differ considerably, which leads to
considerable confusion. Old questions are restated, especially regarding the legitimate
role of religions in public life. But new questions also intrude upon us, above all one
containing a problem of defi nition: Where is the line to be drawn between religion as a
legitimate part of identity and a politicized religious fundamentalism which claims the
systematic violation of universal basic rights as its own paramount religious right?
In recent decades the world has been confronted with an important fact which is often
neglected in the current discussions. The basic rights conventions adopted by the United
Nations in 1966, which were ratifi ed by numerous countries, represent all the world’s major
religions. Above all, however, an internal differentiation into various currents and political
tendencies is to be observed at present in all traditional religious cultures without exception.
Moreover, empirical research confi rms that in all the world’s religions – depending
on the social conditions – there are larger or smaller groups of people who interpret the
religious tradition they are committed to in a particular way: namely that peaceful co-ex-

istence and active co-operation with other religions is a self-evident duty. They regard the
basic social and political values which they associate with their religion as recognizing the
equality of all philosophical, cultural and religious identities, so long as they also accept
the principle of the mutual recognition of all. 2 This trend towards the convergence of all
the world’s religions has found powerful expression in the interreligious movement “World
Ethos”, which stresses the basic social and political values they have in common. 3
Thus the revival of religious feeling – in many individual countries but also throughout
the world – assumes many contradictory forms. A resurgence of personal religious
faith exercised with respect for the democratic rule of law is also to be observed, for example.
At the same time, two tendencies are engaged in a strange rivalry whose outcome
is still open: the fundamentalist claims to power of politicized religion, on the one hand,
and a spreading awareness of the shared basic social and political values of all the world’s
religions, on the other. The causes and effects of these developments are evidently as
complex as their public perception.
I.3 The clash of civilizations ideology
In this confusing situation great and probably lasting damage has been done by the
ideologically inspired thesis of a new clash of civilizations. With this thesis the wellknown
American political scientist Samuel P. Huntington has attempted to reduce the
wide variety of new religious and cultural phenomena to a single concept – albeit one
that is much too crude and empirically unfounded. 4 According to his interpretation, the
traditional religions of this world in their social and political essence are fundamentally
incompatible with one another, which leads him to conclude that a growing political
confl ict between them is inevitable. Huntington sweepingly attributes the use of religion
to achieve political supremacy and a corresponding inability to co-operate with other
religious groupings fi rst and foremost to Islam.
Peaceful co-operation, respect for universalist basic rights, religious tolerance and
the functioning of real democracy are therefore essentially out of the question in Islamic
societies, just as they are in international associations in which their representatives take
part. Consequently only a policy of containment, if not outright subjection, can be an effective
means of dealing with confl icting religions, especially Islam, in order to guarantee
peace and stability in a globalized world.
Huntington’s theory of the necessity of a dominance-oriented use of his own religiously
impregnated “culture”, that of the “West”, is quite clearly an ideology dictated by
self-interest. Nevertheless, and perhaps for this very reason, it has irrevocably entered
the worldwide debate and now exerts a baleful infl uence on the perception of the relationship
between religion and politics for important groups of players in all traditional
religions. It is primarily the political fundamentalists in all religions who justify their declarations
of war on dissenters in their own camp or against other religions and cultures
with the argument of incompatibility à la Huntington. 5
2 Martin E. Marty / R. Scott Appleby (eds.): Fundamentalisms Observed. Chicago 1991.
3 Hans Küng / Karl Joseph Kuschel: Erklärung zum Weltethos. Die Deklaration des Parlaments
der Weltreligionen. Munich/Zürich 1993.
4 Samuel P. Huntington: The Clash of Civilazions and the Remaking of World Order. New
York, 1996.
5 Thomas Meyer: Identitätspolitik. Vom Missbrauch kultureller Unterschiede. Frankfurt/Main
2002.
127

128
I.4 Constellations of players
The players who determine the revived area of confl ict between religion and politics
are as varied as the trends and fault lines of this relationship. As regards the presumed
or actual renaissance of personal religious faith in many countries and within the various
traditional religions, it is mainly academics and journalists who offer their interpretations
to the public, although in some cases representatives of individual religious
groupings also formulate their claims. As long as these players keep their interpretations
and the conclusions they draw within the framework of the democratic rule of law and
transnational co-operation, they do not constitute a problem for a workable relationship
between religion and politics. Not only that: if they keep within the legal bounds of the
legitimate practice of religion in modern democracy, they can also make a contribution
to public enlightenment on the subject.
This applies particularly to the central players in the World Ethos movement who represent
all religions of the world, both in their formal organizations and in the informal
sphere. 6 Their attitude and the strength of their convictions, in particular, enable them
to make important and, in some cases, highly effective contributions to clarifying the
complex relationship between religion and politics: above all, the relationship between
religious identity and the equal right to co-existence of different religions in each country
and in the emerging world society as a whole, as set forth and called for by the universal
basic rights. This work of enlightenment concerns all levels of political activity: the individual
countries, the regional co-operation systems and the whole world political arena.
Far more spectacular than these new forms of interreligious co-operation, however,
are the public appearances by representatives of politicized religions of fundamentalist
hue, be they religious leaders, government ministers or opposition politicians, who
make fundamentalist causes their own, or ideologues, publicists and intellectuals who
advocate the cause of fundamentalism by resorting to the use of open or veiled ideological
slogans. In recent times such players often seem to be engaged in a paradoxical
interplay, even though their goals are diametrically opposed. Populist provocateurs and
fundamentalist agitators are as much a part of this as bogus liberals, who “want to repay
in the same coin” and media, which only direct attention to spectacular confl icts and
riots and not to the everyday reality of intercultural relations. This fatal interplay can in
some cases coagulate into a kind of clash of civilizations industry, in which all the players
involved do service to the fundamentalist vision of the world by combining to play up
apparent intercultural or interreligious incompatibilities.
As a result of all these developments the religious and cultural dimension has acquired
a central signifi cance in global politics. In addition to political and economic factors,
religious and cultural factors play a signifi cant role in many situations; they can do
a lot to exacerbate economic and political confl icts, foil efforts at co-operation and generate
large-scale confl icts to which no fair solution seems possible. This applies in equal
measure to the internal affairs of individual countries, to co-operation in the regions and
regional co-operation systems, and to world politics.
I.5 The cultural factor in the world arena
Whether a path of increasing co-operation and fair globalization can be embarked
upon in world politics will depend, above all, on how the balance of forces between two
6 Hans Küng: Weltethos für Weltpolitik und Weltwirtschaft. Munich, 1997.

tendencies develops: on the one hand, there is an increasing awareness worldwide of
the shared basic social and political values of all religions and, on the other, the fundamentalist
use of religion as part of a socio-cultural or political power strategy. Thus the
strengthening of the actors by fostering awareness of commonalities is one of the most
important ways of securing the basic development goals of a peaceful, just and co-operative
world order. Equally important is the containment of the fundamentalist use of
religion, which is one of the main challenges of the future.
However, since fundamentalism is not just an intellectual interpretation of religious
tradition, as detailed analyses have shown, but primarily an expression of social, economic
and political crises and confl icts, such a containment policy requires a comprehensive,
multi-dimensional and long-term action strategy. In order to be realistic and
successful, this strategy must combine social, economic and political elements effectively
and convincingly. 7
II. NEW EXPERIENCE FOR GERMANY
II.1 Domestic policy: religious and cultural pluralism
All the tendencies described above also affect the Federal Republic of Germany, both
with regard to its domestic situation and its European and transnational policies. In recent
decades, fundamentalist players were to be observed in Germany, albeit on a relatively
small scale. Some of them justifi ed a commitment to terrorist violence in terms
of religious and cultural identity. To this must be added that, in the public debate on
the issue, all sorts of integration problems of migrants are attributed to a religious and
cultural minority background, just as spectacular acts of violence are to the effects of
religious motives.
Some commentators and infl uential sections of the mass media even ascribe integration
problems and individual acts of extremism – such as the so-called “honour killings”
– to the basic inability of people with different religious and cultural identities to co-exist,
in keeping with Huntington’s theory. In everyday life and in mainstream public discourse,
however, a culture of peaceful co-existence between religions and cultures prevails, even
though there is often no real understanding of the religion and culture of others.
Germany has just embarked on an in-depth discussion of what the relationship should
be between religious and cultural identity and the civic status shared by all in a free and
democratic social order. Important politicians have long refused to recognize the fact that
Germany is a country of immigration. For this reason it is only since the debate on the
Integration Act of 2005 that the much-needed and long overdue discussion of principles is
slowly getting under way, albeit not without numerous misunderstandings and confl icts.
In essence, the position that Germany as a constitutional democracy has to adopt in
relation to the various dimensions of the relationship between religion and politics both
in domestic and foreign policy is clearly laid down in the constitution itself. It is true that
Germany – unlike its neighbour France – is not defi ned by its constitution as a secular
republic. Its public law approach, however, does make the state adopt a clear position of
active neutrality towards religions and philosophical communities, which is compatible with
7 Manuel Castells: The Information Age. Economy, Society and Culture. Vol. 2: The Power of
Identity, Oxford 2000.
129

universal basic rights and according to which the state has to respect and treat all religions
and world views equally, so long as they, for their part, respect the democratic rule
of law. The state does not have to keep out of religious affairs on principle, as it would be
required to in a secular state, but if it does intervene it must strictly adhere to the rules of
equal treatment for all religions. 8
130
II.2 The debate about the “Leitkultur” (defi ning culture)
In the past, however, we have seen that this precise constitutional provision can in
practice lead to very different positions on the part of the most infl uential political and
media actors, especially in the parliamentary parties, which play a decisive role in determining
state policy. The most striking expression of these differences is the debate about
a “German Leitkultur”, which began in the 1990s and has been fl aring up occasionally
ever since. In the opinion of conservative and cultural commentators, it is not enough for
all citizens to be in agreement on the basic social and political values of a constitutional
democracy and its political culture. Yet this is the view taken by left-wingers and cultural
liberals as well as the spokesmen of the main religious migrant groups, who insist on a
restrictive interpretation, namely the necessity of a basic consensus on the social and
political values which are necessary for successful integration.
By contrast, the conservatives would like to move beyond the political culture and make
large parts of the core culture of “German tradition” compulsory for migrants and adherents
of the various religious and cultural identity groups. Those raising this demand, however,
overlook the fact that, in the wake of the cultural differentiation that is taking place in
all modern societies, a core culture of this kind linking all members of the majority society
ceased to exist some time ago. Thus the concept of the “Leitkultur” turns out to be a PR
strategy to mobilize the electorate and cast suspicion on political opponents.
The spokesmen of migrant groups, especially Muslims of various provenance, refer to
the constitution in their opposition to this levelling concept. They claim the right to determine
their own cultural and religious identity and way of life in harmony with universal
basic rights. In this the Social Democrats, Greens and Liberals are their political allies.
II.3 European identity
This domestic constellation is increasingly affecting Germany’s European policy. Inside
the European Union and in their general foreign policy stance all German governments
have pursued a policy of recognition anchored in basic rights despite the new
virulence in the relationship between religion and politics. Thus, when it comes to declarations
and offi cial documents, the principles of political secularism and recognition
of the equal value of all religions and denominations that recognize basic rights have a
solid foundation. Yet the position of the CDU and since 2005 certain new tones of the
grand coalition government on the issue of Turkey’s accession to the EU, infl uenced by
the conservatives, give rise to doubts about the sustainability of this position as a fi xed
element in Germany’s European policy. This development is seen by many actors, especially
Muslims in the EU and Turkey, as an unacceptable return of the religious factor to
European policy.
8 Hartmut Kress: Religion im säkularen Staat. In: Neue Gesellschaft/Frankfurter Hefte, No.
12, 2006, pp. 20–23.

II.4 Global responsibility
In the global arena there is a lot of evidence that the voice and the attitude of Germany
with regard to the new politico-religious fault lines are seen by the actors affected,
especially in Islamic quarters, as being insuffi ciently in keeping with its own declared
position. After all, Germany sees itself on the world stage as an unreserved advocate of
international law and its core, the universalist basic rights of the UN covenants of 1966,
whose chapters on civil, social and cultural basic rights contain a clear commitment to a
policy of recognition, which includes equal respect for all religions.
Doubts about consistent adherence to the associated policy of fair and equal respect
for all religions arise in the minds of some observers as a result of the various comments
and activities of offi cial German spokesmen in relation to Turkey’s accession to the EU
and to the – in this respect – sensitive parts of US global policy. At the very latest since
the new policy adopted by the Bush administration, the USA is perceived in nearly all
developing countries, in many countries of Asia, and by the vast majority of Muslims all
over the world as a world power whose policy is based on supremacy and the glaringly
unequal treatment of different religions and cultures. In the eyes of these critics, the
policy of the USA is committed to the terms of reference of the Huntingtonian clash-ofcivilizations
ideology. This view is not only based on the argument that its attitude to the
Middle East confl ict has little credibility. An important point of criticism concerns the
strategic manner in which the Bush administration conducts its self-proclaimed “war
on terror” both in domestic and foreign policy as well as its treatment of prisoners and
suspects in this “war”.
In these important questions the attitude of Germany is measured by many actors in
the Third World and other religious, mainly Muslim countries and communities by how
the key political players behave with regard to the religious or pseudo-religious dimension
of international relations and confl icts. A major role is also played by the question
as to how far Germany supports the USA on these issues, both symbolically and in real
terms, and whether it succeeds in living up to its own principles by marking out its own
separate position in a convincing and credible way.
The role of the religious and cultural dimension in international relations is often
regarded as a challenge for cultural policy alone. That is why, in offi cial documents
on foreign policy, it has not yet been accorded the signifi cance it deserves in a world
plagued by religious and pseudo-religious confl icts. In view of the present world situation,
however, it is essential, for the reasons set out above, to take proper account
of its actual signifi cance and of the extraordinarily explosive nature of its ambivalent
potential. This requires a differentiated analytical understanding of the issues involved
both by the politically interested public and the responsible political institutions and
actors.
The prime concern of the leading political players must be to consider the religious
and cultural dimension in all areas involving international action and to make sure that,
in any given case, Germany’s policy of recognition is expressed in no uncertain terms.
An important contribution could be made by using opportunities of symbolic or real political
signifi cance to effectively present its own position to the global public. It is of vital
importance that Germany should clearly and consistently assert its traditional role as an
advocate of universal basic rights even under the conditions of global terrorism and the
fi ght against it.
131

132
III. SCENARIOS
The dynamic of the tense interaction of religious and political factors in world politics
appears to be open at the current point in time. In the discussions that follow we can
ignore the revival of personal religious faith of the kind that accepts democracy and the
rule of law. Regardless of whether this revival continues to grow in strength, as many
observers suppose, or not, it is a trend that represents no threat to democracy, political
co-operation or a fair world order. No possible developments in this fi eld could involve
any novel challenges. But the situation is very different with regard to the future prospects
of two trends which are in sharp contradiction to each other: political co-operation
between traditional religions and cultures, on the one hand, and a fundamentalist policy
of confl ict, on the other.
III.1 Scenario: Fundamentalist confl ict spirals
Series of related factors
It is possible that the fundamentalist confl ict scenario in the global arena, at the regional
level and in a few large democratic countries is constantly gaining ground and
that, for a lengthy period of time, it will generate a self-renewing tendency of increasing
escalation. A whole series of related factors points to such a development.
Even if a policy of recognition is proclaimed at the symbolic level, fundamentalist agitation
will continue to receive fresh impetus as long as there is a failure to fulfi l the most important
socio-economic and political conditions in a way that would convince all concerned
worldwide that all religions really were being treated with equal respect. The same effect
would be produced by a policy on the part of the USA, or even of Europe, that accepted a
suspension of the Middle East confl ict under conditions that would be understood in the
Islamic world as an affront to its claims to religious and cultural identity as well as a gross
violation of the conditions for a fair compromise on socio-economic interests.
If, on top of this, a unilateral or multilateral policy of hegemony is pursued in the
global arena, which in the eyes of the Islamic countries appears as a form of political
strong-arming, this tendency would be further reinforced. The same applies to the distribution
of enrichment opportunities and resources in the developing countries. Most of
these countries belong to other religious and cultural traditions than the leading world
powers, many of them to Islam.
Since there is no more compulsive and strongly motivating political language than the
politico-religious ideology of the fundamentalists to articulate confl icts over resources
and grievances concerning political exclusion in the modern world, this ideology gains
an almost unrivalled signifi cance in the formulation and organization of everything from
protest to violent resistance under the conditions described above.
Likely confl ict spirals
This tendency can be considerably reinforced by the functioning mechanisms of an
emerging “clash of civilizations industry” to the point when it becomes almost irreversible.
A sample of paradigmatic quality in this respect was the cartoon dispute unleashed by the
Danish periodical Jylland Posten in 2006. In this case the cycle of confl ict escalation, driven
by the antagonistic interaction of actors of the “clash of civilizations industry”, moved from
a right-wing, populist-motivated, religious provocation to an apparent confl ict of principle

etween cultures. This triggered the expected reaction from Islamic fundamentalists in all
parts of the world, namely a hate-fi lled struggle not only against the actual instigators of the
provocation, but against the country from which the provocateurs came, and fi nally against
the whole of “Western Christian civilization”. This development, in turn, quickly brought
liberal actors onto the scene, who felt obliged to defend their culture against unjustifi ed
attacks, thus misconstruing the actions of the Islamic fundamentalists as an expression of
the culture they represented. The media enlarged, aggravated and prolonged the confl ict
by lurid reporting on all spectacular activities, thus enhancing both the incentive payment
for these activities and the tendency to escalation.
A further twist in these confl ict spirals might consist in such coverage causing the
boundaries between Islam and Islamism to become gradually blurred among large sections
of the public, so that an essentially fundamentalist view of the others could spread
in liberal democratic countries as well. To the extent that such a view fi nds its expression
among the public, in civil society and in the lives of both individual countries and the
global public, it could prepare the ground for the spread of fundamentalist attitudes – as
compensation for withheld recognition – in other religions as well.
Violence-promoting climate
Such a scenario could create a worldwide atmosphere in which terrorist activities and
violent confl icts fl ourish at all levels. The conditions for co-operation and understanding
would then become considerably worse. Once the dynamic is suffi ciently advanced,
it could become a self-perpetuating process for quite some time, making it more and
more diffi cult for the counterforces to intervene successfully and win acceptance for a
realistic, cooperation-oriented view of the others. Many zones of confl ict in the world,
such as Northern Ireland or Sri Lanka with its clashes between Tamils and Sinhalese,
illustrate the potential and the development mechanisms of such a dynamic. In this process,
repeated and continuing violence – as both examples impressively demonstrate – is
decisive in escalating the confl ict, as it seems to provide vivid proof of the asserted incompatibility
of the religions involved.
Events since 11 September 2001 and the way in which the USA has so far been waging
the “war on terror” both at home and abroad favour the unfolding of this scenario.
III.2 Scenario: Intercultural co-operation
Convergence of basic political values
At present a desirable and certainly possible, though by no means certain, alternative
scenario would appear to be an increasing convergence of basic social and political
values among the world’s main religious and cultural traditions, both in the regions and
in the great majority of countries.
Peaceful co-existence in mutual recognition of religious cultures requires no convergence
of religious beliefs. All it needs is the common acceptance of those basic social
and political values which make political co-operation and mutual acceptance possible,
i.e. fi rst and foremost universal basic rights. A politico-cultural convergence of this kind,
which does not entail any surrendering of religious beliefs or cultural identity, is already
noticeable among important elites of all religious cultures, albeit to different extents and
with varying degrees of attraction. 9
9 Cf. Küng, ibid.; Meyer, ibid.
133

A tendency towards increasing convergence in this sense is promoted by the modernization
of societies, by increasing regional co-operation at the political level and by
premiums for transnational co-operation under conditions of globalization. The more
the population’s level of education rises, the more the standard of living improves and
makes the development of a democratic framework for practical co-operation with representatives
of other religious and cultural traditions possible and likely, the more the
lure of fundamentalism will be weakened. Co-operation between representatives of other
cultural-religious traditions at the transnational level and in civil society facilitates convergence
on basic social and political questions and calls fundamentalist claims and interpretations
into doubt.
The world’s resources must be fairly shared
The convergence scenario would gain traction if credible efforts to achieve a more
equitable distribution of the world’s material resources and the fair involvement of all
countries in political decisions concerning them were discernible. A key instance as far
as the Islamic world is concerned is the need to fi nd a solution to the Middle East confl ict
that is acceptable to all parties. Such a solution presupposes convincing signs of a policy
of recognition in the countries and regions involved, which apart from equal esteem for
all religions in private life and in the public sphere would also bring about progress in
integrating religious and cultural minorities, and in particular letting them have a fair
share of social resources.
Other major contributions to this development include the introduction of intercultural
learning processes in the entire educational system of the individual countries and
efforts to create civil society and day-to-day co-operation between the various religious
milieus. The mass media, in particular, can play a decisive role here.
An important step in promoting this scenario could be for the mass media in the individual
countries, when dealing with this explosive issue, to refrain from the kind of sensationalism
that only focuses on the most spectacular occurrences with respect to the minorities
within religious communities. Instead, they should see their task as one of political and
moral enlightenment in conveying a fair and realistic picture of the various religions, even
if the logic of the media does not always provide the best of starting points.
Political players
Although the role of government and other political players in this area of activity
is limited, a lot can still be done to create a framework and bring infl uence to bear. For
a start, educational targets can be set for the pre-school, school and further education
curricula. Another form of infl uence is the use of sanctions against the fundamentalist
misuse of religion to violate the basic rights of others as well as the pursuit of good relations
with other religions and their representatives, of which politicians can set a public
example every day.
All this depends, of course, on how successfully educational, social and economic
policy can be applied at all political levels to effectively demonstrate the fair and equal
treatment of adherents of all religions and cultures in the public sphere and to confront
people in their everyday lives with the real value of a co-operative policy of recognition
for all. This requires the consistent pursuit of a policy of fair globalization. If the USA
were to switch to this course under new leadership, decisive impetus could be given to
the emergence of such a scenario.
134

IV. GERMANY: PARTNER IN A WORLDWIDE BASIC RIGHTS POLICY
IV.1 Actors and levels of activity
How the tense relationship between religion and politics is going to develop is still an
open question. The prospects of success for these different options will be determined by
a large and indeterminate number of actors operating in different spheres. They include
states and transnational institutions, parties, civil societies and religious communities
and, fi rst and foremost, the mass media. The interactions between the national, regional
and global arenas are close and direct under the conditions created by globalization and
the electronic mass media.
Whether the rebirth of religion can take place within the framework of a general
recognition of basic rights is largely a matter for the actors themselves. They can, by their
example and a convincing defence of their view of the relationship between religion and
politics, do a lot to advance the process of interreligious and intercultural consensusbuilding
through the recognition of basic political values. Such a course will in practice
refute – even more than the relevant discourses – the fundamentalist policy of confl ict in
all camps. For this reason these actors should be actively supported by government and
civil society actors in the establishment of intercultural forums, publication opportunities,
encounters and networks. The importance of a sustained commitment to this kind
of activity is often underestimated by political leaders, as media neglect keeps it out of
the public eye. It is not spectacular, barely visible, but indispensable because of the depth
and breadth of its social effects.
Of key importance to a successful integration policy is a system of education which
is able to iron out social and language differences at an early, pre-school stage and guarantees
all children, regardless of origin, equal opportunities for personality development
and later choice of career. In this way social relations between people of different religions
and cultures can come to be seen as normal early on in life.
IV.2 Basic rights instead of “Leitkultur”
Domestically, the German state has opted not for strict secularism, but for a policy
of active neutrality towards all religions and world views. In a state dedicated to public
welfare and the rule of law this includes an educational and economic policy geared to
integration and socio-economic equality of opportunity. On the other hand, a “Leitkultur”
which goes beyond the political culture of the democratic rule of law and the ability
of all citizens to have an active share in it and demands the assimilation of other religions
and cultures at the level of personal core culture is not only illegitimate, but also counterproductive.
For such a demand deepens the gulf between religions and cultures and
strengthens the fundamentalist voices and organizations in the minority cultures as well
as the right-wing populist potential in the majority culture.
IV.3 European identity
The same essentially applies to the European level. Here, however, there are two questions
of fundamental signifi cance to be resolved. One concerns how the European Union
is to defi ne its cultural and political identity in its constitution. Even today the Union is
a highly multicultural society and will become more so in future. It is home to almost 11
million Muslims, who are spread over a fairly large number of member countries and,
135

apart from small splinter groups, are essentially integrated into their majority societies.
These Muslims accept the rules of the democratic rule of law and claim the recognition
of their religious and cultural identity, as long as they continue to place value on it. If
they are citizens of their countries and hence also of the European Union, they have an
unqualifi ed claim to have their equal rights as citizens recognized. If they live in their
host countries without having the rights of citizens, they can claim to have their religious
and cultural identity recognized by appealing to universal basic rights. This indisputable
claim must be taken into account in a clear and unmistakable manner when defi ning the
identity of the Union in the European Constitution. Religious traditions have no place
in the description of the identity of a democratic community governed by the rule of
law nor in the related citizens’ role expected by everybody. Under these circumstances,
giving prominence to an individual religious tradition will certainly be understood by
adherents of other traditional religions as a bid for hegemony, which would deprive the
legal, democratic and, above all, secular claims of the European Constitution of their
credibility. Such a procedure would have grave consequences in the shape of religious
and cultural confl icts. It is therefore important that, in these debates and in the decision
to be taken on a constitution, the Federal Republic of Germany should adopt a clear public
position and underpin it with convincing arguments.
The admission of Turkey to the EU, which has latterly become the subject of controversy
again, is also of great symbolic signifi cance in this respect. Muslims inside and outside
Turkey will take careful note of whether religious considerations come into play in the arguments
and decisions of the leading actors in the European Union, both governments and
NGOs. If there is a widespread impression that the European Union, as a “secret Christian
club”, is closing its doors to Turkey primarily because of its Islamic majority society, this
would not only have negative effects on the internal situation of the rejected country. It
could also bring about a sharp change in the attitude many Muslims living in EU member
countries have to their majority societies, so that far-reaching and possibly long-lasting alienation
effects might be expected. It can also be anticipated that in all parts of the Muslim
world the accession thus withheld would be interpreted as a strong expression of disdain
and exclusion – with correspondingly negative consequences for co-operation between
states, religious communities and societies in the global arena.
136
IV.4 The role of civil society
Not everything that is necessary for the promotion of a policy of co-operation can
be provided by the state. This applies equally at the national, regional and global levels.
Civil society can assume a considerable role in the promotion of a positive relationship
between religion and politics in a world of cultural pluralism. Comparative studies have
shown that co-operation and understanding between different religious and cultural social
groups fl ourish best, and distrust and prejudices can be most effectively dispelled
and prevented, where areas of activity are penetrated by different milieus and civil society
in an overlapping of religions and cultures. The state cannot replace civil society as
an actor in these areas of activity, but it can support and promote it.
IV.5 A consistent orientation in the global arena
The international policy of the USA and the relationship of other political actors to it
play a key role in the prospects held out by the two opposing scenarios in the global are-

na, although there will be intensive repercussions on regions and national societies. This
applies, above all, to Islamic fundamentalism’s worldwide potential for development. Of
great importance for its extremist, violent element and its sympathizers is what Ernst-
Otto Czempiel calls “contexts of terrorism”. This is a reference to three major sources of
confl ict in the world: the unresolved Middle East problem; the crassly unjust distribution of
prosperity between North and South; and the power-oriented US policy of hegemony in the
world arena. These areas of confl ict constantly provide fundamentalist agitators, even in
the remotest provinces of individual countries in Asia and Africa, with arguments justifying
their central thesis: that “Western Christian” culture intends to dominate and exploit
the rest of the world, especially the Islamic part of it.
It is in relation to these questions that the actors concerned and their associates are
taking a close look at the symbolic positions and realpolitik strategies of individual countries.
Germany, both as an individual actor and in association with the other member
states of the European Union, must therefore give a clear presentation of its notion of a
policy of recognition in relation to these problem areas in a manner that is conscientious,
has long-term credibility and is symbolically unequivocal. Germany’s offi cial policy of
recognition in the relationship between different religions and cultures must be communicated
and implemented as a model for the whole spectrum of German politics in a way
that is clear in its programme and consistent in practice. Recognition of the equal value
of all religious and cultural identities, so long as they for their part respect universal basic
rights, as well as a fair share for all in the material resources of world society, must be the
recognizable direction taken by German policy in all political arenas.
If Germany is to make the contribution it is capable of to strengthening the forces of
political co-operation worldwide, the most reliable course it can take in the long term
– including in terms of realpolitik – is one of consistent commitment to international
law and, in particular, to the universal basic rights enshrined in the UN covenants of
1966, as they incorporate in exemplary fashion the combination of basic civil, political,
social and economic rights, on the one hand, and basic cultural rights, on the other. It
should provide the key signpost for a policy of recognition which, for its part, expects
recognition of all the actors concerned.
About the author: Thomas Meyer is Professor of Political Science at the University of Dortmund and Head
of Studies at the Political Academy of the Friedrich-Ebert-Stiftung.
137

PERSPECTIVES OF GERMAN IMMIGRATION POLICY
138
Steffen Angenendt
This article authored by Steffen Angenendt was originally published by Friedrich-
Ebert-Stiftung, London Offi ce, London, 2007
Germany is the main immigration country in Europe. As in other countries, German
politics are facing the challenge to manage this process, taking into account political, economic,
demographic and social criteria and interests. The present paper describes the main
trends and challenges German immigration policy faces in the years to come.
After a long period of political discussions, a new German immigration law came
into force in January 2005. The law imple mented was viewed as a long-term meas ure, a
workable basis for future German immigration policy and even as the “most modern immigration
policy in Europe” (Otto Schily) 1 .
How is this reform and the policy pursued since then to be viewed at a distance of al most
two years? Did the new law really pave the way for a “workable future” Ger man policy?
In order to answer these questions, certain fundamental migration policy facts need
to be stated:
Germany has a long history of immi gration: There has been a continual stream of workrelated
immigration into Germany from the days of the Kaiser through the Weimar
Republic and the Third Reich into the present-day Federal Republic of Ger many.
Germany has a high proportion of im migrants: By international comparison, Germany
has one of the highest propor tions of immigrants. The microcensus of 2005
fi nally provided some reliable statis tics on this subject: about one fi fth of the population
in Germany has an immigrant background - a fi gure twice as high as hith erto
assumed from the offi cial statistics on foreigners and which is approximately equal to
the number of immigrants in a “classical” immigration country like the USA.
Germany has actively managed immi gration: There is a perception in Germany that
successive governments have not managed earlier waves of immigration at all or at least
not effectively. This is not true, since the immigration of guest workers, asylum-seekers
and repatriating Germans has at times been monitored and managed very effi ciently.
Germany has integrated many immi grants successfully: Germany can boast considerable
success in the integration of certain immigrant groups (refugees, repatri ating
ethnic Germans, a fi rst wave of guest workers). Yet, those successful integration models
and instruments were not always suffi ciently transferred to other immigrant groups.
CURRENT MIGRATION TRENDS AND THEIR LIKELY MEDIUM TERM PER SPECTIVES
What is important for a long-term immigra tion policy is not simply knowledge of
previ ous successes, but also a realistic evalua tion of current migration trends and their
1 Steffen Angenendt works as researcher for the German In stitute for International and Security
Affairs. He is one of Germany’s leading experts on international migration and demography.

likely future perspectives. The following sets out the important trends for Germany and
Europe and their political implications.
1. Immigration into Germany is currently on the decrease, but will increase again
In the past few years, immigration into Germany, in particular the infl ux of asylum
seekers and late repatriating ethnic Ger mans, has decreased. At the same, emigra tion
by highly-qualifi ed professionals has increased. The immigration-emigration bal ance is
at present still positive, with ap proximately 55,000 more immigrants per year than emigrants
(2004), though it must be said that this is markedly lower than the average of about
200,000 immigrants which prevailed for many years, and on which most medium-term
population forecasts are based. 2 The main reason for the reduction in immigration is
Germany’s weak economic performance in recent years and a more re strictive immigration
policy from 1992. It can however be assumed that immigra tion into Germany
will increase again in the medium term, since there is increasing pressure for migration
at international level, an growing economic and demographic need for certain types of
immigrants and the fact, that some immigrants simply retain a right, under certain circumstances,
to im migrate (EU citizens, family members of immigrants already living
in Germany, late-repatriating ethnic Germans, asylum seek ers). Finally, there will also
continue to be a considerable infl ux of illegal immigrants to the country.
2. The ethnic diversity of immigrants is on the increase
Immigration to Germany comes from an ever greater number of countries of origin, and
increasingly also from far-fl ung regions of the world. Cumulative fi gures on immi gration
between 1999 and 2004 show that the largest groups of immigrants in that pe riod came
from Poland, although they ac counted for only 12.6% of all immigrants. This diversifi cation
trend will in all probabil ity continue, and result in overlapping and expansion of migration
patterns and in new forms and routes of migration. Overall, we can expect the foreignnational
population in Germany to become more diverse in fu ture. That in turn will make
economic, social and cultural integration of immigrants even more diffi cult and require
new integration policies to cope with growing ethnic and cultural diversity.
3. Forms of immigration will become more diverse
Migration is ever less a question of defi nite emigration and immigration; instead it
is in creasingly a question of a concept for a change in lifestyle for a particular period
of time or phase in people’s lives. The Global Commission on International Migration
(GCIM) found in its report 3 that “circular” and “commuter-type” migration is increas ing
on a global scale and new forms of temporary employment are emerging. In view of continually
decreasing transport and communication costs, this trend is likely to continue,
driven additionally by the fact that many industrial nations are making their la bour mar-
2 Cf. the publication of the Federal Offi ce for Migration and Refugees: Migration, Asyl und
Integration in Zahlen, Nürn berg, 2006 as well as the migration report from the same offi ce, commissioned
by the German government (Migra tionsbericht 2005), 2006, at www.bamf.de.
3 Cf. World Commission for International Migration, Migra tion in einer interdependenten
Welt: Neue Handlungsprin zipien, Berlin, 2006, www.gcim.org.
139

kets ever more fl exible and will in future make use to an even greater extent of short-to
medium-term immigrants to cope with bottlenecks in the fi eld of labour provision. It is
as yet not possible to conjec ture what social effects these new forms of immigration will
have on either the countries of origin or on those to which workers are migrating. But it
is certainly clear that future integration policy must address the issues connected with
these forms of migration.
4. Immigration of less-skilled workers will continue, and the need for qualifi ed immigrants
will increase
Immigration of less-skilled workers into Ger many has continually increased over
the past ten years, from 198,000 in 1996 to 330,000 in 2005. In 1996 the proportion of
less-skilled workers to overall immigration was only 25%, while by 2005 the fi gure had
reached 45%. 4 That proportion has in creased so drastically primarily because successive
governments have reacted to growing economic demand and have in creased quotas for
those (mainly limited-contract) workers accordingly. At the same time, the need for qualifi
ed immigrants has increased, not just in Germany but in many other EU states, as can
be seen in the opening up of immigration policy in recent years in Ireland, Sweden and
the UK. In Germany too, the new immigration laws made way for a few strictly limited
opportu nities for immigration by highly qualifi ed people, though this did not result in an
overall increase in the immigration of highly-qualifi ed professionals.
In the medium term, we can expect demand for less-skilled and qualifi ed workers
both in Germany and in the other EU states to con tinue in parallel.
140
POLITICAL CHALLENGES OF THE FU TURE
What is decisive for future immigration pol icy is which political challenges are likely
to be associated with possible immigration and how these should be evaluated. The following
sets out fi ve central challenges which have been identifi ed.
1. Demographic development
Since the end of the nineteenth century, Germany has been undergoing a thorough
demographic transformation: fertility and mortality rates have decreased, while life expectancy
has increased. The age struc ture of the population in Germany has changed
fundamentally and will continue to change. The proportion of younger people will continue
to decrease and the number of older people continue to increase. This de velopment
generates serious problems for the tax-fi nanced social service system and it is possible
that the ability to innovate and the willingness to take risks within society will decrease.
It is even not beyond the bounds of possibility that a torpid, retro spective approach to
domestic and foreign policy will take hold based on asset mainte nance and aversion to
change. It will not be possible to stop such a demographic trans formation either in Germany
or in the other industrial nations, and politicians will be re quired to implement a
wide-ranging array of measures in various fi elds of policy in order to at least soften the
effects of this trans formation.
4 Cf. BAMF, Migration, Asyl und Integration in Zahlen, op.cit., p. 71ff.

One problem is that the theoretically obvi ous solution of balancing this unfavourable
population development by encouraging immigration is not a politically realistic
ap proach. According to predictions by the United Nations, Germany would need
188 million immigrants to enter the country by 2050 in order to maintain the balance
be tween the working population and economi cally inactive population at its present
level. 5 The demographic diminution and a geing of the population can therefore not be
reversed simply by immigration. The politi cal challenge here is to implement an integral
policy which encompasses incentives for Germans to have more children as well as
extending people’s working lives and re forming the social service system while at the
same time pursuing a targeted immigra tion policy ensuring a constant infl ux of young
and qualifi ed people.
2. Labour markets
Demographic change in Germany will also have a knock-on effect on the supply of
la bour. In contrast to demographic predic tions, which at least in the medium term can be
viewed as relatively precise because the important main criteria are already known and
calculable today, labour market predic tions are dependent upon a host of non-foreseeable
factors. It is not possible to make exact quantitative predictions of me dium-to longterm
labour requirements, es pecially according to individual job sectors and professions,
either from a methodologi cal or empirical angle; the only possible forecasts are of a qualitative
nature. Con sequently, it is possible to predict that if net immigration continues at
its present rate of 180,000 people (this being the average over the past 15 years, though
the trend is on the decrease and unless it is reversed this number will not be achieved) 6
the la bour supply in Germany would decrease in the medium term, and there would not
be enough trainees to fi ll skilled jobs. 7
It is also indisputable that demand for highly qualifi ed workers will increase and that
the signifi cance of the service sector will ex pand as a result. There will at the same time
be a glut of less qualifi ed workers, and unemployment among such people whether they
are immigrants or not -will remain high. There will also continue to be a mismatch in the
labour market: there will be jobs for less qualifi ed people which can not be fi lled by Germans,
because they are not mobile enough or because the jobs are only temporary, the
wages too low and too close to available state benefi ts. The politi cal challenge in all this is
to create a frame work and motivation in order to bring back as many unemployed people
as possible into jobs. At the same time, politicians need to counteract the threatened lack
of quali fi ed and highly skilled workers by exploiting the potential of German nationals
(by rais ing the retirement age and increasing the number of women in work). Where
workers are urgently needed to fi ll jobs, however, measures must be in place to facilitate
the infl ux of such workers. There are at pre sent, despite the new immigration legisla tion,
no suitable regulations in place for this.
5 Cf. United Nations Population Division, Department of Economic and Social Affairs, United
Nations Secretariat, Replacement Migration: Is it A Solution to Declining and Ageing Populations?,
ESA/P/WP.160, New York 2000, http://www.un.org/esa/population/publications/migration/cov
er-preface.pdf.
6 Cf. German Federal Offi ce for Migration and Refugees: Migration, Asyl und Integration,
Nürnberg, Dec. 21, 2005.
7 Cf. Committee of experts, op.cit., chapter 6.
141

142
3. Integration
Despite successful integration in earlier years, there are still considerable integra tion
problems in certain immigrant groups, some of which are increasing. As is the case with
poorly qualifi ed Germans, unem ployment is high especially in the case of immigrants
with low-level qualifi cations. The proportion of young people from an immi grant background
leaving school without any qualifi cations has risen sharply in re cent years. In
large cities, as many as 40% of young immigrants leave school without qualifi cations and
therefore without any job prospects. Similarly, the number of immi grant recipients of
social security benefi ts is increasing. 8
The results of the PISA studies 9 showed clearly the close correlation between children’s
success at school and their parents’ professional qualifi cations. In an interna tional
comparison, Germany’s early and highly selective three-stream school system showed
considerable weakness in the abil ity to balance out educational disadvantage. This applies
in particular to immigrant chil dren.
For that reason, integration policy must, es pecially in the fi eld of education, be addressed
as an urgent issue for the immedi ate future. It must above all prevent a sce nario
in which people are permanently ex cluded from participating in essential areas of everyday
life (work, education, political involvement), leading them to seek alterna tives in
their ethnic community and retreat ing, effectively, into an ethnic ghetto. Politi cal efforts
and fi nancial resources must be concentrated on this matter. When it comes to forming
policy, there must be recognition of the fact that the immigrant population liv ing in
Germany is becoming more hetero geneous, and that integration measures need to suit
the circumstances in order to be effective. Mechanistic and one-size-fi ts all policies will in
future achieve less and less. Encouragement of integration must not be limited to encouragement
to learn the German language, important though that is; it must also be linked
to integration into working life. Integration succeeds best through work, and if a person
is not in em ployment, then language knowledge is not going to help with integration. 10
In recent years integration of immigrants has taken on a pivotal signifi cance in the
political arena. The new immigration legisla tion generated an intensive discussion about
integration which was intensifi ed in connection with the PISA study and recent reports
about certain immigrant groups wishing to return to their country of origin and the increase
in youth crime, especially in the large industrial and commercial cen tres.
In July 2006 a “National Integration Sum mit” was organised to which representatives
from the world of politics, business and so ciety in general including numerous immigration
organisations were invited. The aim was for an “Integration Forum” to work out
a National Integration Plan by summer 2007. 11 Coordination is in the hands of the Federal
8 Cf. Report by the Federal Goverrment’s representative for Migration, Refugees and Integration
on the situation of for eigners in Germany, Berlin, August 2005, http://www.bundesregierung.de/
Content/DE/Publikation/IB/A nlagen/ausl_C3_A4nderbericht-6-teil 1,property=publicationFile.pdf .
9 Latest PISA Study (2003) cf. PISA Consortium Germany, PISA 2003: Results of the second
comparative study of countries, summary, Nov. 3, 2005, http://pisa.ipn.uni kiel.de/PISA2003_E_
Zusammenfassung.pdf.
10 Cf. also Federal Interior Ministry: Evaluation der Integrati onskurse nach dem Zuwanderungsgesetz.
Abschlussbericht und Gutachten über Verbesserungspotenziale bei der Um setzung
der Integrationskurse, Berlin, December 2006.
11 See Bundeskanzleramt publication, Gutes Zusammenle ben – klare Regeln Start in die Erarbeitung
eines Nationalen Integrationsplans, Berlin, 14.7.2006.

Government’s representative for Migration, Refugees and Integration Maria Böhmer,
who is also a state minister in the chancellor’s offi ce. The integration plan is meant to
encompass the aims and meas ures of the integration policy at federal, re gional and local
level and to include those involved from society as a whole, and to contain suggestions
for the evaluation of the measures.
A further example of dialogue at a high po litical level was the establishment in September
2006 of the German Islamic Con ference, which at the invitation of the Fed eral
Interior Minister aims over the next two to three years to encourage an intercultural
dialogue at regular intervals between state institutions and the representatives of the
Muslims in Germany. 12 It is intended that this forum should spearhead a debate about
German society and its agreed val ues, about religion as enshrined in the German constitution,
about business and the media as a bridge between cultures and about internal
security, Islamist aspirations and the prevention of Islamic acts of terror.
It is as yet too early to make any judge ments or draw any conclusions from these two initiatives.
At the same time they are welcome steps towards integrating immi grants and their
organisations into a regular dialogue with representatives of the state and social groups.
4. Internal security
Since September 11, 2001, security as pects have played a far greater role in the immigration
policy of many countries than ever before. In Germany the recognition that
the attacks which took place in the USA were planned and undertaken by im migrants,
some of whom had for some time lived in Germany, was a source of some disquiet. Two
“security packages” were fast-tracked through the legislative process without much political
debate, pertaining to closer monitoring of asylum seekers. Since a “visa scandal”,
which revealed that visas for entry into Germany had been granted without suffi cient
grounds and without prior monitoring, granting of visas is now handled in a more
restrictive manner, and police and intelligence service observation and moni toring of
potential Islamists has been tight ened. This has led to several successes in investigative
cases, though this is thanks more to cooperation with neighbouring countries’ intelligence
services than the “profi ling” instigated in some German Länder (which incurred
the critical wrath of civil rights advocates). The activities of Muslim organisations
in Germany are under closer surveillance, and the German gov ernment has already
opened up a dialogue with those Muslims living in Germany and their organisations
by way of the aforemen tioned Islamic Conference. The security services are especially
concerned about the possible political radicalisation of young Muslims without employment
prospects. This is yet another reason why integration policy has received an
enhanced profi le of late within overall German government pol icy, as evidenced by the
federal integration summit.
5. Foreign policy and development aid policy
Cross-border migration has become an ever more important factor within international
politics. Many people expect their governments to cooperate much more closely
12 See http://www.bmi.bund.de/cln_012/nn_1018358/Internet/Conte nt/Nachrichten/Pressemitteilungen/2006/
Einzel seiten/Islamkonferenz__Kurzinfo.html.
143

with other states in order to deal with the challenges the situation presents. 13 Overall, the
desire for interstate and inter national information, agreement and coor dination between
countries of origin, transit nations and destination countries has in creased. Immigration
policy is no longer an internal matter; foreign policy angles and players are becoming
ever more important. It is clear that monitoring cross-border mi gration and dealing with
its consequences can now only be handled by international cooperation and with the
involvement of NGOs. In order to achieve this, improve ment is required in the national
instruments for managing migration, including clearer and more transparent immigration
regula tions and procedures and their coordination by several states. In addition,
there is a need for an international migration man agement system, while the hitherto
all too rudimentary international agreements on the obligations of countries of origin,
transit nations and host countries towards mi grants need to be strengthened. What is
more, the signatories to the Geneva Con vention on Refugees need to put more ef fort into
maintaining the principles of the convention and its dissemination, and also eradicate
existing loopholes (or newly emerged ones).
144
THE NEW IMMIGRATION LAW FROM 2004 AND ITS EFFECTS
Germany has a very large immigrant popu lation, coming third world wide in absolute
terms, after the USA and Russia. And yet, the history of German immigration policy is
full of examples of how, by concentrating on current urgent problems, agreement of
long-term goals were put on the back burner, giving rise to a policy with unfore seen or
undesirable side effects and ulti mately doing more harm than good. The new German
immigration legislation from 2004 was aimed at avoiding this short-term approach and
creating a legal framework for long-term immigration policy.
Two years after the coming into effect of the law, defi ciencies in two key areas have
be come visible:
Firstly, the mechanisms for the monitoring of the present situation and for the
forecast ing of future migration trends are still insuf fi cient. Above all there is a lack of
proce dures for the defi nition of the number and type of immigrants Germany wishes to
wel come. Migration policy instruments are as yet incomplete. For example, neither the
points system 14 , orientated to human capital and therefore to the chances of integration
of potential immigrants, nor the “bottle-neck procedure” 15 aimed at determining the
workforce requirements of various sectors of industry and business in relation to immigration,
have been implemented. This means that decisive instruments for tar geted
workplace-related and demographi cally-orientated immigration are missing.
Secondly, despite the improvements im plemented with the immigration law, the integration
policy is not comprehensive enough. It is too heavily weighted towards immi-
13 Cf. also: Global Commission on International Migration (GCIM), Migration in an interconnected
world: New direc tions for action, 2005 .
14 See Independent Commission on Immigration, “Zuwan derung gestalten, Integration
fördern”, Berlin 2001, http://www.zuwanderung.de/downloads/Zuwanderungsberic ht_kurz.pdf
15 See Expert Panel on Immigration and Integration, “Migra tion und Integration – Erfahrungen
nutzen, Neues wagen”, Berlin 2004, http://www.bamf.de/cln_042/nn_708926/SharedDocs/Anlagen/DE/Migration/Downloads/ZuwanderungsratGutachten/gutachten-2004-zuwanderungsratlang.html

grants’ improvement of language knowledge (language courses) and their general knowledge
of Germany (orientation courses), and there is too little systematic emphasis on
measures linked to workplace integration. Social reporting about the living standards,
perspectives and opinions of immigrants living here in Germany is still patchy.
CONCLUSION: NECESSITY FOR A PAN EUROPEAN IMMIGRATION POL ICY
In recent decades, management of immi gration and integration of immigrants has
become an ever more important subject of European cooperation. Decisive steps in the
communalization of asylum and immi gration policy were the Amsterdam Agree ment
of 1997 and the fi ve-year implementa tion plan agreed in October 1999 in Tam pere. The
European Commission took on a key role in this process from an early stage, presenting
numerous suggestions for a common policy on asylum and immigration, though these
did not meet with the approval of all the member states. Many EU member states see immigration
and integration as a key part of sovereignty and are very reluc tant to give away
control on these issues.
In this atmosphere of confl icting interests within a union of countries with open
bor ders, increasing immigration pressure and a refusal at national levels to relinquish
sov ereignty over this issue, there is the desire to push forward the implementation of
the programme agreed in The Hague in No vember 2004, aimed at advancing common
domestic and judicial policy in the EU by the year 2010. 16
Technically speaking, there is no alternative to more intensive European cooperation
on this issue. It is quite clear that immigration into the EU and the individual European
states will continue to increase. A problem-related and realistic European immigration
policy needs to anticipate future migratory needs, manage immigration in a socially acceptable
form, taking account of the EU’s obligations under international humanitarian
law and the global political status of the European states while also contributing to assuaging
the desire to migrate. In Decem ber 2005 the European Council agreed its “Global
Approach to Migration” and an ac tion plan for Africa and the Mediterranean countries,
providing a conceptual frame work and initial steps.
Humanitarian aid agencies and overseas development aid organisations in the EU can
also help to reduce the causes of mi gration. It remains possible that the afore mentioned
creation of limited migration openings along the traditional migration routes can help to
reduce illegal immigra tion into Europe. To achieve this, the mem ber states would have
to agree on immi grant entry quotas, something which is not yet in sight. Whether such
a policy can be successful can only be evaluated when the individual governments have
explained what they understand by “circular” migra tion, and whether in particular they
are in favour of general encouragement of mobil ity or simply of temporary immigration
by another name, that is, a rejuvenation of the well-known guest-worker programmes.
In general, the member states will put more emphasis than hitherto on the development
of international refugee protection schemes and on the fi nancial, infrastructural
and staff resources of the international governmental and non-governmental organisations
that are already dealing with this issue. Efforts to reduce illegal immigration will
16 Cf. for overview Steffen Angenendt, Steuern, schützen, integrieren – Die schwierige Vergemeinschaftung
der Migra tions-and Asylpolitik, in: Werner Weidenfeld (Hrsg.), Euro-pa-Handbuch,
4. Aufl . (im Druck).
145

have to rely on more than just joint monitoring of outer borders; they must also address
do mestic demand for illegal workers and re duce the attraction of illegal employment. Experience
so far with European asylum and immigration policy would suggest that there
will be more delays along the way, especially when it comes to joint agreement on worker
immigration, and in relation to in tegration of immigrants. There remain con siderable
diverging interests in member states on these two issues, depending on individual economic
structure, regulation of the labour market and traditional immigra tion policy.
Common solutions will continue to be found where pressure to act is similar, that is
pri marily in the area of control of outer bor ders.
146

THE INTEGRATION OF YOUNG MALE MUSLIMS
IN GERMANY EDUCATION AND TRAINING AS KEY
AREAS FOR SOCIAL INTEGRATION
Frank Gesemann
This article authored by Frank Gesemann was originally published by Friedrich-Ebert-
Stiftung, London Offi ce, London, 2005
Grave unrest in French cities has triggered in Germany, too, broad-based public debate
on integration policies and practices. It is felt almost universally that neither “a
ghetto-like situa tion” nor a “fundamental feeling of hopelessness” prevails among young
immigrants in Ger many. Many voices do point out at the same time, however, that the
group of those who “have nothing to lose” is growing. The national chairman of the Turkish
Community in Ger many has in this context appealed to the Federal Government to
intensify measures aimed at promoting integration and equality of opportunity. The educational
situation and the circum stances on the apprenticeship and labour markets are
so precarious that they could very well provide fuel for protest. If this development continues
in coming years, then the danger of social unrest looms in Germany, too, warns
Kenan Kolat: “Many young people not of German background feel themselves excluded
and could vent their anger and hate in a similar fash ion.” 1
Unsatisfactory achievement in schooling and vocational training, a high unemployment
rate among the young and a lack of perspectives for the future, along with concentration
in prob lem-ridden city quarters with high ethnic clustering, all present a hazard.
This hazard is that Islamist organisations will exploit prevailing feelings of exclusion
and marginalisation in order to provide new hope and an identity to disoriented youths
without any perspectives for the future. 2 Following the murder of Dutch fi lmmaker Theo
van Gogh in October of 2004, the Federal Government’s Commissioner for Integration
proposed a “three-step political pro gram”. It included (1) concerted opposition to Islamist
efforts, (2) active confrontation with concepts of inequality and constraints rooted in
religious or cultural heritages, and (3) a pol icy of recognition, including accepting Islam
as a co-equal religion and integrating Muslims both legally and politically. 3
MUSLIMS IN GERMANY
Statistics on the number of Muslims
There are no exact fi gures on the number of persons of the Muslim faith currently living
in Germany. This is due to the fact that German authorities do not record Muslims as
1 Press release by the Turkish Community in Germany. Berlin, November 5, 2005.
2 According to Tahar Ben Jelloun, this is “the reason why some youths have broken with France
and its model for society and have committed to the Islamist movement.” Die Zeit, No. 46, November
10, 2005, p. 45.
3 Cf. Federal Commissioner for Migration, Refugees and Integration, Islamismus bekämpfen – Islam
einbürgern. 20 Handlungsvorschläge. Berlin, 2004, http://www.integrationsbeauftragte.de/gra/
themen/826.php.
147

a separate group within the population and the religious preferences of immigrants are not
systematically recorded. Religious affi liations within the population were last determined in
the public census conducted in May of 1987. At that time 1.651 million persons indicated that
they were of the Muslim faith, including 1.325 million Turkish citizens and 48,000 German
citizens. Of the Turkish nationals living in Germany at that time, about 93 per cent were listed
as being members of the Islamic religious community. 4 Only estimates have been available
since that census. In the Government’s response to a Parliamentary question on the subject
of Islam in Germany, the number of Muslims living in what had been West Germany was
estimated to be between 2.8 and 3.2 million persons on January 1, 2000; of these, about 2.5 to
2.7 million were resident aliens and 370,000 to 440,000 were German citizens. 5
According to unoffi cial information provided by the Central Institute Islam Archive this
corresponds to the number of Muslims living in Germany at present. One assumes 3.2
million persons, almost a third of whom were born in Germany. The number of Muslims
who hold German citizenship has in the meantime more than doubled and is estimated
to be 950,000. Of them, only 14,352 are Muslims of German descent (spring of 2005). 6 According
to statements by the Federal Bureau of Statistics about 1.8 million Turkish nationals
and more than 640,000 naturalised citizens of Turkish origin resided in Germany at the
end of 2004. Immigrants of the Muslim faith are also found in large numbers among
those arriving from Arabic nations (about 500,000), 7 from Bosnia-Herzegovina (186,000),
and from Iran (129,000), Afghanistan (95,000) and Pakistan (49,000) (both resident aliens
and naturalised German citizens). In total, the number of resident aliens originating
from primarily Muslim countries came to 2.4 million as of December 31, 2004. To these
may be added 966,000 individuals from the same countries who had been naturalised in
the period from 1988 to 2004 (cf. Table 1). 8
Table 1: Resident aliens in Germany and naturalised German citizens from predominantly
Muslim countries of origin
Country of origin Foreigners As of Dec. 31, 2004 Naturalisations 1988 to 2004 Total
Turkey 1,764,318 642,505 2,406,823
Bosnia-Herzegovina 155,973 29,529 185,502
Iran 65,187 63,555 128,742
Morocco 73,027 49,197 122,224
Afghanistan 57,933 37,432 95,365
Unknown* 47,064 16,287 63,351
Lebanon 40,908 32,099 73,007
Iraq 78,792 14,354 93,146
4 According to information by the Centre for Turkish Studies (2004: 26) 88 per cent of the Muslims
of Turkish origin adhere to the Sunnite school and 11 per cent to the Alevi school of Islam.
5 Cf. German Bundestag (2000).
6 Spring survey by the Central Islam Archive Germany Foundation (2005); an extract is available
at http://www.islamarchiv.de/akver/demographie.html (accessed 21 September 2005).
7 The exact number of immigrants from Arabic countries is not known since an unknown
number of Palestini ans and Kurds (particularly those from Lebanon) are listed in offi cial statistics
as “stateless” or with “unclear“ citizenship.
8 Federal Bureau of Statistics, Bevölkerung und Erwerbstätigkeit. Ausländische Bevölkerung sowie
Einbürgerungen, Topical Matters 1, Series 2. Wiesbaden, 2005.
148

Country of origin Foreigners As of Dec. 31, 2004 Naturalisations 1988 to 2004 Total
Pakistan 30,892 17,988 48,880
Tunisia 22,429 19,815 42,244
Syria 27,741 13,120 40,861
Algeria 14,480 4,886 19,366
Egypt 10,309 5,005 15,314
Jordan 8,145 6,816 14,961
Indonesia 10,778 1,566 12,344
Eritrea 5,698 8,370 14,068
Bangladesh 4,286 2,268 6,554
Sudan 3,357 1,054 4,411
Libya 2,963 229 3,192
Yemen 2,099 280 2,379
Saudi Arabia 995 30 1,025
Others** 1,131 57 1,188
Total 2,428,505 966,442 3,394,947
* Largely Palestinians
** Bahrain, Qatar, Kuwait, Oman, U. A. Emirates Source: Federal Bureau of Statistics (author’s
own calculations)
The number of Muslim children and young people is estimated by the Central Institute
Islam Archive to exceed 850,000. 9 According to information provided by the Federal
Bureau of Sta tistics, about a quarter of the Turkish citizens living in Germany are under
18 years of age (456,200 individuals, of whom 236,800 are male). 88.2 per cent of the children
and young people with Turkish citizenship were born in Germany. To these must be
added not only chil dren and young people who are naturalised citizens, but also, subsequent
to the reform of German citizenship laws effective January 1, 2000, those who can
claim German citizenship based on their place of birth (children born on German soil to
foreign citizens). The share of Muslims among all live births in Germany is made clear in
a press release issued by the Federal Bureau of Statistics on August 12, 2005. There it was
stated that in 2004 the number of children with Muslim parents came to 9.1 per cent of
all new-borns (64,000 of 706,000 infants).
Religious attitudes and systems of values among young people of Turkish descent
Empirical research on youth-related issues has in the past largely disregarded the
subject of religion. Moreover, studies on religion and religious fervour among youths in
Germany were referenced almost exclusively to German young people. In many studies
on the situation of immigrant youths, too, the subject of religion was assigned a subordinate
position for many years. It has only been since the mid-1990s that the religious
orientation of young immi grants, and above all those with Turkish-Muslim backgrounds,
has moved further to the fore ground in surveys conducted by the social sciences. 10 In the
13th Shell Study on Youth, for instance, it was emphasised that, “the Islamic religious
9 See note 5.
10 See in this context the detailed depiction in Boos-Nünning / Karakaşog˘lu 2004, pp. 462 ff.
149

community [forms] a milieu in the sense that it not only places its stamp on religious attitudes
and practices, but also radiates into other dimensions.” 11
Vigorous controversies were triggered by the 1997 study prepared by Wilhelm Heitmeyer
and his associates at the Institute for Interdisciplinary Research on Confl ict and
Violence at the University of Bielefeld. 12 With their analysis on the extent of and reasons
for fundamentalist Islamic orientation the authors wanted to “contribute to both avoiding
the creation of taboos and relegating the subject to the area of the scandalous while
at the same time fostering democratic public discussion”. Quite in contrast to the enlightenment
intended by the study, its results were taken above all by the media as evidence
for the existence of “ticking bombs in the suburbs” or the “failure of the multicultural
society” in Germany. Critics from the social sciences sector ac cused the authors of “ethnicising
problems” or in fact even employing “culturally racist proce dures”.
The authors named several complexes of causes which might explain the considerable
extent of an Islam-centred claim to superiority and an explicit readiness to do violence,
based upon religion, among Turkish youths. Among the most important causes were:
– the injustices against resident aliens which they had themselves experienced,
– the refusal by the majority society to recognise any collective identity,
– concrete discrimination in the private sphere,
– the negative impact of modernisation processes in society,
– withdrawing into one’s own ethnic group,
– emphasis of an identity, based upon nationality and religion, aimed at delineation
and self-segregation,
– the rejection of “modern” educational values, and
– a high potential for confl ict within the family.
The preparedness to resort to violence which is based on religious attitudes is, in the
authors’ opinion, due to “a highly emotionally charged bundle of causes stemming from
individual biographical aspects and social and political factors”. The situation will presumably
become even more critical in coming years. This development does indeed not
inevitably culminate in violent action, but does require the appropriate public attention.
Karin Brettfeld and Peter Wetzels (2003) carried out a criminalistic analysis of the dayto-day
relevance of religion and the association with violence. They evaluated a set of
data based on representative polls of pupils aged 14 to 17. This survey had been carried
out by the Criminialistic Research Institute of Lower Saxony in four major cities
and one rural adminis trative district. 13 The study come to the conclusion that Muslim
youths are the group, among the young immigrants, who experience the most severe
social disadvantages and are the least integrated in terms of both linguistic skills and
11 Fuchs-Heinritz (2000: p. 161). Adherence to religious denominations: 27% of German youth,
but only 6% of Turkish youth are not affi liated with any religion. Religious practices and attitudes:
14% of German youth and 35% of Turkish youth attend religious services at least once a month. The
share of Turkish youth who pray sometimes or regularly, read religious books or intend to incorporate
religion when raising their children is about twice as large among Turkish youths as among
their German peers (in each case with female youths having a lead).
12 The study analysed the results of a standardised, written query of 1,221 youths of Turkish origin,
aged 15 to 21, conducted in 1995 at 63 schools and vocational schools in North Rhine-Westphalia.
13 Those queried were pupils in their ninth year of school and the pre-vocational year in the cities
of Hamburg, Hannover, Munich and Leipzig as well as youths in the Friesland District. The overall
query sample included 11,819 youths, of whom 7.4 per cent indicated that they adhered to Islam.
150

social status. They are far more often affected by domestic violence than youths in other
religious settings. They internalise to an above-average extent traditional gender roles
and exhibit a greater acceptance of standards of masculinity which legitimise violence.
Strong religious ties are accompanied in young Mus lims, as well, with less linguistic and
social integration, a far greater acceptance of violence as factor in rearing children and
a stronger divergence of traditional gender roles and mascu linity concepts, all of “which
makes violent response in confl ict situations more likely”. 14
A current study by the Centre for Turkish Studies (2005) shows among Muslims of Turkish
descent in the 18 to 30 age group, those who characterised themselves as devout or more
likely devout, rose from 63 per cent in 2000 to almost 80 per cent in 2005. The increasing
signifi cance of religion is also refl ected in the attitudes toward the separation of church and
state and on controversial religious topics. Overall, a “stronger polarisation between the
very devout and those who are not at all devout” was determined. The concept of the separation
of church and state was rejected by 27 per cent of those queried in the 18 to 30 age
group. 59.2 per cent of those polled 15 agreed with the statement, “Muslim women should
in general wear the hijab in public”, and 29.7 agreed, either in principle or completely, with
the state ment, “I think that boys and girls should not take physical education classes together
or go on class trips together”. Almost 60 percent of respondents indicated that they
would have diffi culty with their son or daughter marrying a non-Muslim. 16
The poll shows in addition that the degree of religious devotion among Muslims of
Turkish descent is also infl uenced by the educational level and the socio-economic situation.
“Where there is more schooling, the understanding of religion is more liberal than
where there is less education; attitudes toward the hijab and physical education classes
are infl uenced in particular by the educational level. The social position also makes itself
apparent. Unemployed immigrants are conservative to an above-average extent, as are
housewives. White-collar workers and the self-employed are considerably more liberal.” 17
One quarter of the Turkish Muslims between 18 and 30 years of age saw living in a Christian
country as very diffi cult or more likely diffi cult. It is indeed true that 70 per cent
wanted to remain in Germany, but 30 per cent intended to relocate to Turkey. For 30 per
cent of those queried Turkey is their only homeland, 29 per cent feel equally at home in
Germany and Turkey, and 36 per cent see Germany as their homeland.
The results of the polls indicate that second- and third-generation Muslims exhibit
an inconsistent coincidence of increasing secularisation and growing religious devotion.
Here religious devotion satisfi es important functions for young Muslims.
It imprints itself on their own images of themselves in a “modern” and “secular” majority
culture which, seen against the background of their heritage, is sensed as being
“foreign”. It stabilises the ethnic communities in their social interactions with the majority
society and becomes a spiritual, social and po litical refuge particularly in confrontational
encounters, e.g. in light of experi ences with exclusion and discrimination. Islam becomes
a source for interpret ing life in the diaspora and a guideline for practical action. 18
14 Brettfeld / Wetzels (2003: p. 305).
15 Disregarding those who no response to these questions.
16 A comparison with the results of the 2000 poll shows that immigrants of Turkish origin have
become considerably more conservative and that this also applies to the 18 to 30 age group (cf.
Centre for Turkish Studies, 2004, p. 30).
17 Centre for Turkish Studies (2005: p. 65 f.).
18 Johannes Kandel (2004: p. 2 f.).
151

It may be said in summary that Muslim youths more often live in socially underprivileged
conditions and, in regard to culture, are less well integrated than other immigrants.
Youths of Turkish background are, in addition, signifi cantly more religious than German
youths. It seems that in recent years the divides not only between Germans and Turks,
but also be tween very religious and non-religious Turks, have become wider. Moreover,
strong religious ties among young Muslims are associated with lesser linguistic and social
integration, greater acceptance of traditional gender roles and masculinity concepts, and
a signifi cantly more conservative system of values. Youths of Turkish heritage thus live,
to a much greater extent than their German peer group, in a “conservative value environment”,
wherein better educa tion appears to liberate the greatest potentials for openings
in the direction of the modern world or more modernist value standards. 19
ON THE EDUCATIONAL SITUATION AMONG YOUNG IMMIGRANTS IN GERMANY
In the past, data on participation in education and on scholastic achievement among
children from immigrant families in Germany were keyed only to citizenship. Consequently,
any differentiated estimate of successes in integration and of problems found
among children with an immigration background is hardly possible at present. Since,
in addition, there are no offi cial data on the social background or religious affi liation of
school students, only general comparisons of limited validity can be made, again based
on citizenship status. In-depth information on the academic achievement of children and
young people from immigrant families is offered by the PISA and IGLU international
comparison studies. These, however, contain no information on religious affi liation. Additional
information on educational achievement among Muslim youths can be drawn
above all from several studies of juvenile delinquency.
152
Participation in education
The ratio of foreign pupils in schools in Germany, at 9.9 per cent in the 2004/2005
school year, was slightly higher than the overall share of foreigners in the population as
a whole. The share of foreigners attending any given school varied widely among various
types of schools; it ranges from 18.7 per cent in the Hauptschule to 4.1 per cent at the
Gymnasium. 20 The largest contingent among the foreign pupils (or pupils with foreignborn
parents or grandparents), with a share of 43.3 per cent, comes from Turkey. Smaller
19 Cf. Uslucan (2004b: p. 83).
20 Translator’s note:
Most German states operate fi ve separate school systems in parallel. At the end of four years of
primary schooling pupils are assigned to one of the following types of school:
– The Hauptschule prepares pupils primarily for the trades and skilled vocations; they leave
school after a total of 9 or 10 years of education, usually to seek an apprenticeship position.
– The Realschule prepares pupils in the main for clerical and administrative occupations; they
leave school after 10 years, normally to attend an advanced vocational school or undertake
an apprenticeship.
– The Gymnasium prepares pupils for higher education; the leaving certifi cate, known as the
Abitur and awarded after 12 or 13 years of education, entitles them to enrol at a college or
university.

groups come from countries which are (more or less) Muslim, such as Bosnia-Herzegovina
(2.2%), Afghanistan (1.6%), Lebanon (1.4%), Morocco (1.4%) and Iran (1.3%). 21
Regarding the extent of participation in the educational system, differences can be
found not only between the children of immigrants from Muslim countries and German
pupils, but also among the various home countries. This can be seen in particular in their
distribution accord ing to types of school. As is made clear in Table 2, foreign pupils are
underrepresented at the Realschule and the Gymnasium while they are over-represented in
the comprehensive Ge samtschule as well as in the Hauptschule and the Sonderschule. While
60.8 of German pu pils attend the Realschule or the Gymnasium, only 33.9 per cent of foreign
pupils do so. Dis tribution by gender shows, moreover, that the share of female pupils
attending the Real schule or the Gymnasium is signifi cantly greater than that for the male
pupils (+7.8 per cent among German and +6.3 per cent among foreign female pupils).
Differentiation by selected nationalities shows, however, that educational participation
by various immigrant groups is marked by considerable differences. The share of
male pupils who do not hold German citizenship and who attend a type of school (Realschule,
Gymna sium) which entitles them to pursue further education range from 50.2%
(Iranians) through 26.0% (Turks) and 24.6% (Moroccans) down to 12.7% (Lebanese).
While the participation in education among Germans and Iranians differs only slightly,
the differences to Turks, Moroc cans and, in particular, Lebanese are considerable. More
than the half of the male Turkish pupils and almost two-thirds of the male Lebanese
pupils attend only a Hauptschule or a Sonderschule and thus have hardly any chance of
acquiring a school leaving certifi cate which entitles them to pursue any kind of further
education (at either an advanced vocational school or a college or university).
Table 2: Pupils by nationality, gender and type of school, 2004/05 (secondary education only)
Hauptschule Realschule Gymnasium Gesamtschule
Sonderschule
Others*
German 15.1 21.4 39.4 8.0 6.1 10.0
Male 16.9 21.1 35.9 8.1 7.7 10.4
Female 13.2 21.8 43.0 7.9 4.5 9.6
Foreigners 35.1 16.9 17.0 12.2 11.7 7.2
Male 36.7 15.8 15.1 11.6 13.7 7.1
Female 33.4 18.1 19.1 12.8 9.5 7.2
Foreign pupils (male and female) by selected nationalities
Turkey 39.7 18.0 10.4 14.3 11.3 6.3
Male 41.2 16.8 9.2 13.4 13.2 6.2
Female 38.1 19.4 11.7 15.3 9.2 6.3
Bosnia-Herzegovina 29.4 19.9 20.1 12.1 10.7 7.7
Male 31.9 18.9 16.8 12.0 12.1 8.2
Female 26.9 21.0 23.6 12.1 9.3 7.1
– The Gesamtschule is a comprehensive school which can award leaving certifi cates equivalent
to those granted by all three of the above school forms as pupils qualify for them during the
course of their school ing.
– The Sonderschule provides special education programs for pupils who have cognitive, emotional
or physical handicaps. For the sake of simplicity the German terms are used in the
translation of this study.
21 Federal Bureau of Statistics, Bildung und Kultur, Allgemein bildende Schulen, Schuljahr
2004/05, Topical Matters 11 / Series 1, Wiesbaden: 2005.
153

154
Hauptschule Realschule Gymnasium Gesamtschule
Sonderschule
Others*
Morocco 35.5 16.3 8.3 20.8 13.7 5.5
Male 36.9 14.7 7.3 19.3 15.9 6.0
Female 33.9 18.0 9.4 22.4 11.2 5.0
Afghanistan 22.8 16.4 22.1 22.7 8.1 8.0
Male 23.6 15.7 20.3 22.9 9.2 8.2
Female 21.9 17.2 24.0 22.5 6.8 7.7
Iran 16.4 14.8 38.4 14.8 4.9 10.7
Male 18.3 14.5 35.5 14.7 6.0 10.9
Female 14.3 15.1 41.5 14.8 3.8 10.4
Lebanon 38.8 9.3 4.1 15.5 21.0 11.2
Male 38.2 8.9 3.8 14.9 23.1 11.1
Female 39.4 9.7 4.6 16.2 18.8 11.3
* “Others” includes the so-called orientation step (5th and 6th years) provided in some states,
types of schools with several curricula, the “Independent Waldorf [or Steiner] Schools” and evening
Realschule and Gymnasium facilities along with the daytime academies provided to allow adult pupils
to earn a higher leaving certifi cate.
Source: Federal Bureau of Statistics, Topical Matters 11, Series 1 (the author’s own calculations)
The level of the school leaving certifi cates
The data on the school leaving certifi cates earned by German and non-German pupils
still reveal – in spite of slight improvements in recent years – considerable differences
in educational achievement. In the 2003/2004 school year 84,594 pupils of non-German
citizenship graduated from school; this represents a share of 8.6 per cent of all school
leavers. While one in six non-German youths left school without any certifi cate at all,
this number is only one in 14 for German pupils. Almost 70 per cent of the German
pupils – but only 40 per cent of non-German youths – earned a Realschule or Gymnasium
leaving certifi cate. Particularly great is the difference between German and non-German
school leavers in regard to certifi cates entitling them to enrol at an institution of higher
education. One quarter of the German pupils leave school with the Abitur, the certifi cate
qualifying them to continue their education at a college or university; among non-German
youths it is only one in ten (cf. Table 3).
The data on school leavers show in addition that in the meantime girls on average earn
better leaving certifi cates than boys. The differences between the genders are particularly
noticeable among school leavers of non-German nationality. Markedly more girls than
boys attain the Realschule school leaving certifi cate or earn their Abitur and far fewer leave
school without a certifi cate (cf. Table 3). These data do indeed not dovetail with “widely
held assumptions in regard to the special problems of girls and young women in school
due to a – in comparison to boys with an immigration background – more restrictive
rearing and less support for their educational efforts by the parents”. 22 This has, however,
to date not been the subject of comparative studies. At the same time it is remarkable
that the lower academic achievement of boys from immigrant families has hardly been a
subject in public discussion.
22 Boos-Nünning / Karakaşog˘lu (2004: p. 216).

Table 3: German and foreign school leavers, by type of school and gender, in Germany in
2004 (in per cent)
Type of certifi cate German pupils Foreign pupils
Total Male Female Total Male Female
No certifi cate 7.4 9.4 5.4 18.1 21.7 14.2
Leaving certifi cate from the Hauptschule 23.5 27.0 19.9 40.9 42.2 39.6
Leaving certifi cate from the Realschule 43.7 41.8 45.6 30.8 27.6 34.3
Qualifi cation for enrolment at a university or
technical college
25.4 21.8 29.2 10.2 8.5 11.9
Source: Federal Bureau of Statistics, Series 11, Row 1 (the author’s own calculations)
Vocational education
A qualifi ed vocational education is, in addition to good scholastic achievement, of
particular importance for entry into the labour market and for immigrants’ social integration.
In 2004 the number of apprentices of non-German citizenship came to 72,025;
of these, 70,317 lived in the area represented by the former West Germany (including
Berlin). The number of foreign apprentices has fallen by 40.6 per cent since 1995 so that
their proportion among all apprentices comes to only 4.6 per cent. Thus they are clearly
underrepresented among the apprentices in both the western and the eastern German
states. 23 The situation is particularly precarious in the western states (including Berlin)
where, in 2003, the share of foreign apprentices, at 6.1 per cent, was signifi cantly below
their share in the population, where they represented 12.4 per cent of those individuals
from 18 to 21 years of age. Their apprenticeship quota – the number of foreign apprentices
in comparison with all foreign youths residing in the territories in question here
– was, at 27.1 per cent in 2003, less than half the quota for German youths (60.0%). 24
Persons with Turkish citizenship form the largest group (37.5%) among the foreign
apprentices. However, the number of Turkish apprentices has since 1995 fallen far faster
(-51.8%) than the average rate. The apprenticeship quota for young Turks, at 35.2 per cent
in 2004, was in fact higher than the average value for persons of non-German citizenship,
but signifi cantly below the corresponding value for young Germans. A survey of
integration prepared by the Federal Institute for Ethnologic Research revealed, in reference
to the completion of vocational training programmes, considerable differences between
Germans and Turks. 50 per cent of the Turkish respondents to this poll (and 28.5 per
cent of the Germans) did not complete apprenticeship training. Seen as “cause for concern”
in particular are the “low vocational qualifi cations of Turkish women”. More than
half have no vocational certifi cate at all and only slightly more than one quarter have
completed vocational training with workplace experience. 25 Quite striking is the fact that
the relatively good school certifi cates earned by the girls far more seldom culminate in
vocational training.
Primary among the causes for the decline in apprenticeship training undertaken by
foreign and Turkish youths is the drop in the number of apprenticeship positions available
in Ger many. “It leads to more rigorous selection criteria and thus to a tougher com-
23 Cf. Federal Bureau of Statistics, Topical Matters 11, Series 3, 2004 (author’s own calculations).
24 Federal Ministry of Education and Research (2005: p. 98).
25 von Below (2003: p. 45).
155

petitive situation on the overall market for apprenticeship positions.” 26 The chances for
entering apprenticeship training with on-the-job experience depend above all on the educational
achievement which the youths bring with them and the types of training which
they seek. Further factors are the range of positions offered companies and their selection
procedures, together with the deci sion-making criteria they apply and the structure
of prejudices held by those responsible for personnel decisions. “Foreign youths, and
Turkish youths in particular, are often assumed to have disruptive behaviour patterns or
insuffi cient familiarity with the language or with the German (business) culture. Specifi c
cultural practices are felt to be a disturbance to opera tional routines. This is aggravated
– particularly among small and medium-sized companies – by an assumed lack of customer
acceptance.” 27
The results of a poll of applicants for apprenticeship positions indicate that the
prospects for success among applicants with an immigrant background – with identical
school leaving re sults – lie signifi cantly below those of German youths. The chances
of obtaining an appren ticeship position do, indeed, rise with better leaving certifi cates,
but among youths with an immigration background this rise is less distinct than among
German applicants. 28
156
Reasons for unsatisfactory academic achievement
The results of the PISA comparative study conducted by the OECD show that the
differences in reading competence among youths from upper and lower social classes is
greater in Ger many than in any other country participating in the study. Affected here
in particular are children of the working class and of immigrants. 29 Pupils 15 years of
age, both of whose parents were born in Germany, have chances of attending Realschule
or Gymnasium which are two to three times as good as pupils of the same age who come
from pure immigrant families. The handicaps suffered by youths with an immigration
background are reduced if one takes the social status of the families into account. When
youths of equivalent reading competence are compared, no differences in educational
opportunities are discernible. That is why “neither the social situation nor the distance to
the prevailing culture…” can be made “primarily responsible for disparities in educational
participation”; “rather, of decisive importance is the mastery of the German language”.
“For children from immigrant families language competence is the decisive obstacle in
their educational career.” 30
26 Federal Commissioner for Migration, Refugees and Integration (2004a: p. 59)
27 Ibid. p. 63.
28 Federal Ministry of Education and Research (2005: 102).
29 The share of 15-year-old pupils from families where at least one of the parents was not born
in Germany was found in the PISA Study to be 21.7 per cent (27.1% in western Germany, 3.8% in
eastern Germany). In the west almost one pupil in fi ve, in North Rhine-Westphalia and Hessen one
in three, comes from a family where both parents were born outside Germany. In some large cities
this share can be even as high as 40 per cent.
30 Baumert et al. (2001: p. 37). The results of the International Primary School Reading Examination
(IGLU) show that the difference in reading comprehension among pupils whose parents
were both born inside or outside Germany is relatively great (in international comparison) even
at the end of the fourth year of school ing, even though the primary schools are apparently more
successful than secondary schools in levelling so cial differences among the pupils (cf. Bos et al.,
2003: p. 37).

A comparison among the states within the Federal Republic of Germany shows that
students whose parents were both born in another country achieve signifi cantly lower
performance in all areas of competence than youths without an immigration background.
The degree of dif ference will depend “upon the period of residence in Germany, the language
spoken in the home and the family’s ethnic heritage. The achievement spreads
between the groups, how ever, vary considerably from one [home] country to the next”. 31
Also determined was a corre lation between the number of immigrant pupils and the average
achievement level for the school; this is, however, not linear. A considerable decline
in scholastic achievement may be observed as soon as the share of immigrant children
in the classroom reaches 20 per cent; the difference increases hardly at all if there is a
further rise in this share. 32
A comparison of the levels of competence among children and young people who
speak se lected foreign languages in OECD countries with comparable immigrant populations
shows that attempts to promote these children’s schooling are particularly unsuccessful
in Germany. The PISA data show, “that 15-year-olds who come from families
in which Serbian, Croatian, Bosnian or Turkish or Kurdish is spoken and who attend a
school in Germany exhibit lower reading competence than comparison groups in Norway,
Austria, Sweden and Switzer land”. 33 The results of the PISA 2003 study make it
clear in addition that children of Turkish origin use German in day-to-day activities only
“to a relatively small extent,” even though they were born and attended school in Germany.
In almost all the states “their average compe tence in reading and in mathematics
[is] at a level which makes successful continuation of learning during apprenticeship
training and in the course of their careers appear to be doubt ful”. 34
The results of the Study of Primary Schools in Hannover show, in addition, that the
acquisi tion of reading competence by pupils is “decisively” infl uenced by the context
of social class. Among the central infl uencing factors are individual characteristics such
as the language(s) spoken in the home and during their free time, their basic cognitive
capacities and the educa tion orientation of the home, along with contextual factors
such as the number of immigrant children (immigrant ratio) in the schoolroom and the
competence of the instructor in terms of methods. 35 From the viewpoint of the social scientists
at Hannover it would thus be “short sighted to trace the educational problems of
immigrant children solely to their defi cits in re gard to the German language. Immigrant
children are often affected by cumulative disadvan tages which are based on the living
conditions in the family”. 36 These cumulative handicaps impact children from Turkish
and Arabic immigrant families above all.
A brochure published by the Berlin State Institute for Schools and the Media put forth in
addi tion “hypotheses on the above-average rates of school failure among foreign boys”. 37
The gender bias applied when raising children in families from the Mediterranean region
more strongly “protects” boys from household chores; this hinders their independence
in mastering assignments and assuming responsibility.
31 Baumert et al. ( 2002: p. 58).
32 Cf. Baumert et al. (2003: p. 56).
33 German PISA Consortium (2002: p. 396).
34 Prenzel (2005: p. 34).
35 Cf. Kollenrott et al. (2005).
36 Tiedemann/Billmann-Mahecha (2004).
37 Cf. Weil (2003: p. 3 f.).
157

The lack of individual attention and remedial assistance in the school is dealt with
less successfully, on a psychological level, than is the case with girls and can more easily
culminate in learning blocks or refusal to strive for achievement.
The self-image held by Muslim boys is imprinted by a concept of masculine dominance;
the boys derive from this a sense of superiority which is not based on effort,
achievement or success. Failures at school are dealt with less successfully and aggression
is often employed as a compensatory measure.
This understanding of the gender roles apparently triggers, especially at the high
school level, massive confl icts with self-confi dent female teachers, and such confl icts are
certainly not benefi cial to academic success.
Schools without an intercultural educational concept will not be successful in imparting
the mindset (confi dence, feeling of belonging / identity, respect) essential for learning,
and this leads to learning blocks. This is true particularly for boys, whose adaptability,
fl exibility and frustration tolerance are less developed than among girls.
The Islamic heritage is seen as a negative factor in this context, since the increasing
infl u ence of nationalistic and Islam-oriented organisations tends to multiply confl ict
between the “positive circle of believing Muslims” and the “heathen setting of the German
society”; “Ger man women and women teachers in particular have a particularly low
status in such a friend-foe constellation and have to tediously struggle for recognition as
a person of authority”. 38
The integration survey conducted by the Federal Institute for Population Research offers
more detailed information on educational processes and the career biographies of young
Turkish men. The report shows that “there (is) a group of young Turkish immigrant men
who identify relatively strongly with their country of origin, who do not earn a Realschule
or Gym nasium leaving certifi cate, who embrace traditional values, whose parents have
either no school leaving certifi cate at all, or only the one from the Hauptschule, and who
do not appear to have ‘arrived’ in Germany”. 39 About one-third of those queried who
were of Turkish heri tage were found to be in this group. Seen in addition as an important
factor for success within the educational system is “frequent and successful integration
with members of the absorbing society”. Here the social integration of strongly religious
Muslims is seen as “ex tremely diffi cult”, since they only rarely maintain any friendships
with Germans. It remains, however, unclear whether this “has to do with the opportunities
available and their own social resources or is a sign of ethnic (self-exclusion)”. 40
158
REFORM APPROACHES AT THE FEDERAL, STATE AND LOCAL LEVELS
Education and vocational training are the decisive key resources in a process of social
integration for immigrants, a process which extends over several generations. The PISA
results not only made it clear that the German educational system, in international comparison,
achieves average results at best; they also show that no country is less successful
in compensating for pupils’ disadvantages resulting from their social background.
Linguistic competence has proven to be the decisive hurdle in the educational careers
38 Ibid. p. 5.
39 von Below (2003: p. 100).
40 Haug (2003: p. 123).

of children from immigrant families. Many children whose language in the home is not
German and who grow up in areas of high ethnic concentration have almost no contact
with German during the early years of their life; thus language competence testing has
determined that intensive remedial effort is needed before such children enter school.
Insuffi cient mastery of the German language is, in addition, the reason behind many obstacles
which continue after schooling and on into vocational careers, as is demonstrated
by low academic success, meagre participation in apprenticeship programs and the high
degree of unemployment among the young.
Supplementary education for children and young people with an immigrant background
The analyses in international comparative studies have called for the development
of national educational standards and agreements on joint educational reporting by the
federal and state governments. The fi rst educational report, with a focus on the “Integration
into the Educational System for Children, Youth and the Gainfully Employed with
an Immigration Background” is to be submitted in 2006.
The reform approaches followed by the national, state and local governments in the
fi eld of day care centres and primary schools concentrate above all on the following items:
– Extending the educational and training mission for day care centres along with the
nation wide installation of full-day schools; 41
– Anchoring early language promotion in educational curricula for the primary
schools;
– The further development of language competence testing in the primary sector and
the development of instructors’ competence in quality development and quality assurance;
– Linking and co-ordinating the educational curricula and training plans employed in
the pre school and primary sectors, augmented by close networking with other educational
oppor tunities offered by municipal authorities;
– Strengthening remedial instruction in the German language for pupils with an immigration
background and developing concepts to promote multilinguality;
– Greater involvement of parents in institutional education processes and promoting
suc cess in raising children and educational competence within families by way of
intercultural work with parents;
– Raising the educational standards for pre-school and day care teachers to a qualitative
level corresponding to international averages, along with improvements in teacher
training and continuing education.
Ultimately, the success of these approaches will be determined in large part by the
extent to which we are able, over the long term, to improve educational success among
immigrant children affected by cumulative disadvantages. Included here above all are
the children of those Turkish and Arabic immigrant families with low socio-economic
status, with greater susceptibility to unemployment and a lack of perspective, with lower
educational status, and exhibiting insuffi cient encouragement of children within their
families. It will probably be particularly diffi cult to devise plans for the social integration
41 Translator’s note:
Traditionally, the primary school day in Germany is only 4 to 5 hours in length; in the secondary
schools it will comprise 6 to 8 instruction periods of 45 minutes each.
159

of children who live in socially disadvantaged neighbourhoods dominated by ethnic minorities
and in religiously isolated milieus. If we are to promote the social integration of
immigrants in the interest of achieving a sustainable increase in educational opportunity
for children of a Muslim heritage then it will be essential to build strong bridges between
ethnic cultures, religious milieus and places where social interaction occurs. Academic
success presumes not only the development of linguistic and cognitive abilities, but also
the establishment of intercultural and religious competence.
160
Dealing with the heritage of Islam in the school
The Conference of the Ministers for Culture in March of 2003 invited educational
specialists from the states and representatives from public life to discuss the role of education
in the integration of Muslims in Germany. The Weimar Appeal was adopted at the
conclusion of the conference. It emphasises the signifi cance of peaceful and equitable
coexistence of people from varying cultures and religious, mutual recognition by non-
Muslims and Muslims, and the ability to pursue dialogue between the cultures – on both
sides. Educational facilities, and schools in particular, are identifi ed as “outstanding places
for learning dialogue between re ligions and cultures”. To be included in the school’s
missions in regard to educating and rear ing children are to “impart democratic values
and … be open to different cultural traditions and religious and ideological convictions …
[and] promote … intercultural skills”. 42
But the school is not only a place for intercultural dialogue; it is also the site for intercultural
confl icts. These confl icts arise in particular when religion-based dress codes and
concepts of gender relations cannot be reconciled with the mission and the requirements
of the school or with the faculty’s image of itself. Occasions for controversial and emotionally
charged de bates are offered above all by the wearing of the hijab by pupils and in particular
by female teachers 43 , along with the question of Muslim girls taking part in physical
education, swim ming classes and sex education and going on class trips. 44 Schools in town
quarters with high ethnic density report on attempts by Islamist organisations to exert
pressure on pupils, both male and female, and to position themselves as the “watchdogs of
the faith”. 45 Addition ally, dealing with the phenomenon of anti-Semitism among pupils of
Turkish and Arabic heri tage represents a special challenge to the schools.
With the joint initiative of the “Practice Forum School and Islam” the Conference of
the Minis ters for Culture and the Körber Foundation have in this context pursued the goal of
learning more about new and promising approaches in the didactic presentation of the
subject of Is lam in German schools. 46 Among the fi ndings of this initiative are that the
following are nec essary for successfully dealing with cultural diversity:
42 Conference of the Ministers of Culture (2003: p. 135); Extracts from the Weimar Appeal will
be found in the Appendix to the present study.
43 The report by the Federal Commissioner for Migration, Refugees and Integration offers a
detailed depiction of the confl ict over teachers wearing the hijab (2005b: pp. 226-238). As regards
the confl icts in the school, see also Senate Administration for Health and Social Affairs (2004).
44 Ibid: pp. 238 ff.
45 See, for example, the documentation prepared in Berlin: “Wie verändert der Islam die Schule
im Kiez?“ (Senate Administration for Health and Social Affairs, 2004).
46 The results of this initiative are documented in the publication “Islam im Klassenzimmer”
which, by introduc ing quite different and in part new and unconventional approaches in the di-

(1) Training and practising abilities to encourage constructive confl ict among all those
involved, in a spirit of solidarity.
(2) Developing an intercultural atmosphere so that it becomes a major feature in the
school’s own profi le whilst opening the school so that it can be integrated into the residential
setting, as well as
(3) Expanding the spectrum of methods employed in the form of project work and
non-structured forms of learning. 47
There is widespread consensus in Germany, in addition, that “that the religious education
of pupils of Muslim faith is a part of the schools’ mission”. 48 This aim is, however,
implemented in quite different ways in the various states. The bandwidth ranges from religious
instruction included in elective courses in the “mother tongue”, this being under
the purview of the Turk ish Consulate General, or model projects for theoretical instruction
in Islam theology for Mus lim children, or developing confession-based instruction in
religion in co-operation with Is lamic congregations. 49 Among the prerequisites for establishing
Islamic religion courses in German schools is, in particular, that Muslims in the
various states form religious communi ties which satisfy the requirements set down in the
Basic Law [German Constitution] and that chairs for Islamic theology be established at
German universities, charged with responsibility for the training of imams and teachers
of the Islam religion. 50
Islamic religious instruction will offer pupils an alternate to the Koran schools run
by the mosque organisations and give them access to a contemporary understanding of
Islam. Over and above that, it is to promote participation in school life, by parents and
pupils alike. Re ports on various model projects indicate, “including this subject in the
curriculum contributes to parents and their children identifying with the school, often
for the fi rst time, since they – with their strong religious identity – are accepted on equal
footing. Instruction in the tenets of Islam can also act as a moderating infl uence when
there are religion-driven confl icts in daily school life.” 51
SUMMARY
Among all youths with an immigrant background in Germany, young male Muslims
from Tur key, Morocco and Lebanon form the groups which is least socially integrated.
They exhibit the lowest success in the educational system, are often affected by unemployment,
and show considerably higher crime rates. Youths with a Muslim background
are, in addition, more often affected by domestic violence than is the case for youths
from other religious communities. Young Muslims of Turkish and Arabic heritage are, in
addition, on average sig nifi cantly more devout than German youth and the differences
have become more marked in recent years. Strong religious ties among young Muslims
go hand in hand with lower linguis tic and social integration, a clearly more conservative
dactic approach to the topic of Is lam, aims to provide specifi c “impetus for educational work
(see Kleff, 2005).
47 Ibid. pp. 16 ff.
48 Conference of the Ministers of Culture (2003: p. 136).
49 See Federal Commissioner for Migration, Refugees and Integration for information on development
in regard to Islamic religion as an academic subject in schools (2005b: pp. 243 ff.).
50 Cf. Federal Commissioner for Migration, Refugees and Integration (2005a: p. 29).
51 Federal Commissioner for Migration, Refugees and Integration (2005b: p. 242).
161

set of values, greater acceptance of violence as a method employed in rearing children, as
well as more traditional gender roles and masculinity concepts, which increases the risk
of violent responses in confl ict situations.
The sense of social uncertainty prevailing among Turkish and Arabic youths can be
inter preted not only as stemming from less success in the educational system, a defi cit
of per spectives for the future and the increasing competition for ever scarcer jobs and
apprentice ship positions. It is also to be seen as an expression of inter-generational and inter-cultural
confl icts. These youths are particularly likely to be affected “by the ambivalence
of the mod ern world which, on the one hand, means a general broadening of young people’s
chances for self-realisation but at the same time also an intensifi cation of economic
inequalities for certain (marginal) groups in the society”. “Not only must they, like their
German age group peers, master the harmful effects of individualisation, the acceleration
of the pace of life, the uncertainty which they experience etc., but… when championing the
positive aspects of this individualisation (opportunities for self-realisation) [they] also have
to stand up against their parents, who favour a more collectivist orientation.” 52
Schooling and vocational training are the key factors in the process of social integration
for immigrants and offer the greatest potentials for opening up value systems to
be more accept ing of the modern world. If there is to be any signifi cant and ongoing
improvement in educa tional opportunities for children with an immigration background,
then this will require above all massive political efforts to battle poverty and to develop a
sense of community and neigh bourhood. It will be necessary to boost investments in education,
to improve the quality of day care centres and schools in deprived city quarters,
and to introduce early and intensive language training in day care centres of all kinds. Of
signifi cance in addition are developing concepts for general cognitive promotion of children
from socially underprivileged families, greater co-operation and networking among
educational institutions within the catchment quarter, an expansion of schools which
offer full-day curricula, lowering the pupil-teacher ratio in the primary schools, schoolbased
social work integrated into the school’s didactic concept, greater involvement of
parents in the programs offered by child care centres and primary schools, along with
fundamental improvements in the education and ongoing training of teachers in day care
centres, kindergartens and schools.
Educational facilities and schools in particular must, moreover, become to an ever
greater extent “outstanding places for learning dialogue between religions and cultures”, as
is called for in the Weimar Appeal, adopted by the Conference of the Ministers for Culture
on March 14, 2003. “Within the framework of their educational mission, schools must impart
democratic values and must be open to different cultural traditions and religious and
ideological convic tions. At the same time they must promote solidarity and intercultural
skills”. 53 Also included here are religious education in the school and new and amplifi ed
approaches to the peda gogy associated with the subject of Islam. Instruction on Islam is to
provide young people access to a modern and enlightened understanding of the religion.
This will, however, require greater organisation of Muslims in the various states, the development
of suitable curricula and the establishment of chairs for Islamic theology at the
universities to guarantee appropri ate education for teachers of Islamic religion.
Required for implementation are not only redoubled efforts by the national, state and
local governments, but also the establishment of integration networks at the local level.
162
52 Uslucan (2004a: p. 62).
53 Conference of the Ministers of Culture (2003: p. 135).

Acting as operatives in the civilian society, immigrants’ self-help organisations can in this
case make an important contribution to integration. On the one hand they create social
networks which, with their self-help approach, can promote the integration process. On
the other hand they infl uence immigrants’ social orientation. “They can considerably
strengthen acceptance for integration policies within the ethnic groups and spark interest
in integration projects.” 54 In this context, local Mosque associations and Islamic organisations
are called upon to “support the state and society in the integration of Muslims. They
are also responsible for seeing to it that Muslim youth take advantage of the opportunities
which the educational system in a secular state offers to all young people”.“ 55
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APPENDIX
Weimarer Aufruf
„Bildungseinrichtungen, allen voran die Schulen, sind hervorragende Orte zum Erlernen
des interreligiösen und des interkulturellen Dialogs. Zu ihrem Bildungs- und Erziehungsauftrag
gehört es, demokratische Grundwerte zu vermitteln, für unterschiedliche
kulturelle Prägungen und religiöse und weltanschauliche Überzeugungen offen
zu sein, Solidarität und interkulturelle Kompetenz zu fördern. In vielen Schulen lernen
Schülerinnen und Schüler muslimischen Glaubens gemeinsam mit Kindern und Jugendlichen
anderer Religionen und Weltanschauungen. Hier erwachsen der Auftrag zur
Lerngemeinschaft und zum Dialog aus dem schulischen Alltag. […]
Alle Länder sind sich darüber einig, dass die schulische religiöse Bildung von Schülerinnen
und Schülern muslimischen Glaubens zum Auftrag der Schule gehört. Mehrere
Länder haben einen religionskundlichen Islamunterricht eingerichtet oder planen ein
solches Angebot. Wir halten es für erforderlich, ihn dort in deutscher Sprache zu erteilen.
Muslime setzen sich für islamischen Religionsunterricht in deutscher Sprache im Sinne
des Grundgesetzes ein. Dieses Unterrichtsfach kann es allerdings nur geben, wenn Muslime
in den Ländern Religionsgemeinschaften bilden, die den verfassungsrechtlichen
Anforderungen gerecht werden; hierbei ist zu berücksichtigen, dass der Islam nicht amtskirchlich
verfasst ist. […]
Das gemeinsame Lernen von Muslimen und Nichtmuslimen wird nur dann für beide
Seiten erfolgreich sein, wenn es sich im Schulalltag bewährt. Beispiele guter Praxis dafür
sind die Rücksicht auf islamische Speisevorschriften bei Festen und Feiern in Schulen
und die Befreiung von Schülerinnen und Schülern muslimischen Glaubens vom Unterricht
an islamischen Feiertagen. Konfl ikte können entstehen, wenn religiöse Gebote von
Muslimen nicht mit den Erwartungen und Anforderungen der Schule übereinstimmen.
Dafür halten wir Grundregeln für erforderlich.
Es ist nicht die Aufgabe von Schulen, Glaubensüberzeugungen als „richtig“ oder „falsch“
zu bewerten, wenn Eltern oder Schülerinnen und Schüler muslimischen Glaubens
einen nachvollziehbaren Gewissenskonfl ikt darlegen. Schulen sollten sich bewusst sein,
wie sehr es eine Schülerin belasten kann, zum Spielball von Meinungsunterschieden
zwischen Schule und Elternhaus zu werden. Sie wissen, dass eine Schülerin, die aus
religiösen Gründen ein Kopftuch trägt, den Schutz des Art. 4 Grundgesetz genießt. […]
Die örtlichen Moscheevereine und die islamischen Verbände sind aufgerufen, Staat
und Gesellschaft bei der Integration der Muslime zu unterstützen. Es liegt auch in ihrer
Verantwortung, dass die Muslime die Chancen wahrnehmen, die das Bildungswesen im
säkularen Staat allen jungen Menschen bietet. Im Lauf der Geschichte war der Islam immer
wieder fähig, die Lebensumstände der Muslime bei der Interpretation des Koran zu
berücksichtigen. Gerade junge Menschen muslimischen Glaubens in Europa brauchen
solche Leitbilder und Hilfen.
165

Die Integration der Schülerinnen und Schüler muslimischen Glaubens als gegenseitiges
Geben und Nehmen kann das Bildungswesen und vor allem die Schulen in Deutschland
bereichern. Sie kann darüber hinaus ein wesentlicher Beitrag zu einer Kultur der gegenseitigen
Anerkennung in unserem Land sein. Wir rufen deshalb alle auf, die Verantwortung
für die Bildung und Erziehung junger Menschen tragen, sich daran zu beteiligen.“
Weimar, 14. März 2003
166
Weimar appeal
“Educational institutions, schools above all, are outstanding places for learning dialogue
be tween religions and cultures. Within the framework of their educational mission,
schools must impart democratic values and must be open to different cultural traditions
and religious and ideological convictions. At the same time they must promote solidarity
and intercultural skills. In many schools, pupils of Muslim faith learn together with
children and young people of other religions and world views. Here the task of creating
a learning community and of en gaging in dialogue develops in the course of everyday
school life. […]
All Länder agree that the religious education of pupils of Muslim belief belongs to the
mission of schools. Several Länder have established religious education in Islam or plan
to offer it. We think that this education should be given in German. Muslims support Islamic
religious instruction in German in the spirit of the Basic Law. This subject can only
be established, however, if Muslims in the various Länder form religious communities
which are in conformity with the requirements of the Basic Law. It has to be taken into
account that Islam does not have structures like an offi cial church. […]
The common instruction of Muslims and non-Muslims can only be successful for
both sides if it proves itself in school life. Examples of good practice are the observance
of Islamic dietary rules at school festivals and celebrations and the exemption of pupils
of Muslim belief from lessons on Muslim religious holidays. Confl icts may arise if the
religious rules of Muslims do not coincide with the expectations and requirements of
schools. We consider some basic rules to be necessary in this context.
It is not the task of schools to evaluate religious beliefs as ‘right’ or ‘wrong’ if parents
or pupils of Muslim faith demonstrate a comprehensible moral confl ict. Schools should
be aware of how much stress can be placed on a pupil if he or she becomes the subject of
disagree ments between school and parents. They know that pupils who wear a headscarf
for reli gious reasons are protected by Art. 4 of the Basic Law. […]
Local mosque associations and Islamic groupings are called upon to support state
and soci ety in the integration of young Muslims. They are also responsible that Muslims
make use of the opportunities offered to all young people by the education system in a
secular state. In the course of its history, Islam has repeatedly been capable of taking account
of the living conditions of Muslims in the interpretation of the Koran. Especially
young people of Muslim faith in Europe need such guiding principles and support.
The integration of pupils of Muslim faith as a reciprocal giving and receiving can enrich
the education system and, above all, schools in Germany. Moreover it can make a key
contribu tion to a culture of mutual acceptance in our country. Therefore we call on everyone
who is responsible for the education of young people to join us in this endeavour.
Weimar, 14 March 2003

MUSLIM CHILDREN AND THE “RIGHT TO RELIGION”
The long road to Islamic religious instruction in state schools in Germany
Friedhelm Kraft
This article authored by Friedhelm Kraft was originally published by Friedrich-Ebert-
Stiftung, London Offi ce, London, 2006
1. INTRODUCTION
Anyone who visits a school in Hannover or Berlin today will immediately notice one
as pect that is characterising schools to an ever greater extent: Pupils with widely varying
migration backgrounds often domi nate the picture. Ethnic and religious plural ity is an
everyday phenomenon in schools and the question of who is in the majority, or minority,
will certainly vary, depending on the neighbourhood or catchment area. Children of
German extraction have be come a numerical minority at the primary schools in Berlin’s
Kreuzberg district.
Religious education in the schools has by no means been left unfazed by this development.
In many cases children of varying ethic and religious backgrounds attend school
and Muslim children make up largest group by far.
Although it is true that in many instances Muslim children attend either Protestant or
Catholic religion classes, this is not the in tention of educational policies; nor does it represent
the will of the drafters of the German Constitution (Grundgesetz or “Ba sic Law”).
According to Article 7.3 of the Constitution, religious instruction is a “stan dard” subject
that “shall be taught in con sensus with the religious denominations”. Consequently religious
instruction is not a privilege reserved to the Christian churches. Religious instruction
in school devolves from the fundamental right to reli gious freedom (Article 4 of the
Constitu tion); freedom of religion is realised as a “positive” entitlement, contributing to
self-development in school. It follows that all pupils are entitled to a religious education
which corresponds to their religious convic tions.
More than 600,000 Muslim pupils attend school in Germany. A curriculum in the
spirit of Article 7.3 of the Constitution – Is lamic religious instruction as a “standard subject”
corresponding to the pupils’ own faith – has not been implemented to date in any
public school. The reason is at as sim ple as it is complex. There is a lack of per sons or
organisations with which educa tional authorities can interface – institutions which, as
per the wording of Article 7.3, determine and can represent the “funda mentals” of Islam
and who enjoy the legiti misation of a recognised religious denomi nation.
As intractable as the situation might seem, the debate on religious instruction for
Mus lim children in Germany has taken on new dynamics in recent years.
There is no doubt about it. Statements of political intentions to install an adequate
educational curriculum for Muslim children have been drawn up. A subject develop ment
consultation held by the Conference of the Ministers of Culture at Weimar in March 2003
formulated and found consen sus in the following:
167

– The states are all in agreement that aca demic religious education for pupils of the
Muslim faith is a part of the schools’ mission.
– Several states have instituted courses in Islamic studies or are planning to offer such
instruction. We feel it necessary that instruction be given in German. Muslims are
calling for instruction in Is lam, in German, in the spirit of the Con stitution. But this
subject can be launched only if Muslims in the various federal states form religious
organisa tions which satisfy the requirements of the Constitution; what must be taken
into account here is the fact that Islam is not constituted as a centralised [hierarchic]
religious denomination. 1
The wording of the so-called “Weimar Ap peal” is clear and unequivocal. Until such
time as Muslims in Germany have joined forces in unifi ed religious organisations or denominations,
it will be possible only to expand the courses in “religious studies” for
Muslim pupils currently being offered; they cannot be put on a new footing. Muslims will
have to decide between “religious studies” and “Islamic religious instruction” in the spirit
of Article 7.3 of the Constitution. A prerequisite for Islamic religious instruction is amalgamation
to form a religious organi sation. The realisation that Islam is not con stituted as
a “centralised denomination” ini tially precludes any demand to “form a denomination”,
although the question as to which organisational forms are meant, forms which would be
appropriate to Islamic tenets, remains unanswered.
But: The constitutional clarity of the wording refl ects only in part the reality of the
imple mentations which have already been in stalled.
There are several federal states which, in the framework of academic experiments, 2
are testing ways in which Islamic religious instruction can be offered in the schools.
These experiments can, however, only to a limited extent be clearly assigned to the
categories of “religious studies” or “religious instruction”. And the status of development
in the individual states could hardly be more divergent. While in Rhineland-Palatinate
(Ludwigshafen) and Bavaria (Erlangen) pi lot projects are being carried out at
one school each and in Lower Saxony Islamic religious instruction is already being offered
in 19 schools, Baden-Württemberg is plan ning for the fi rst time in the 2006/2007
school year pilot projects at twelve primary schools in cooperation with local parents’
associations and mosque-affi liated congre gations. North Rhine-Westphalia, Bavaria
and Bremen have in fact taken another path. Since the 1999/2000 school year “Is lamic
tuition” 3 has been offered, in German, as an independent subject; the number of participating
schools is currently at 120. In Bavaria, beginning with the 2001/2002 school
year, a pilot project on “Islamic tui tion in the German language” has come to be offered
at 21 primary schools. In Bremen a pilot project on Islamic religious studies has
been running since the 2002/2003 school year. And in Berlin, as is so often the case,
1 Quoted after Martin Stock, 108.
2 Translator’s note: In the thoroughly regimented German school system the “academic experiment”
is an experimental curriculum or educational concept introduced as a trial situation in
specifi c schools. It is not a part of the offi cial curriculum but is fostered as a means of identifying
promising additions to the offi cial curriculum.
3 Translator’s note: For the purposes of this translation the term “religious instruction” is used
to denote exclusively instruction organised and delivered by an established church or denomination.
The term “religious tuition” applies to coursework organised and delivered by a government
agency; the alternate terms “religious studies” or “Islamic studies” have essentially the same meaning
but are used due to a minor differentiation in the German text. The term “religious education”
encompasses all of the above.
168

the situation is entirely different. There the Islamic Federation offers Islamic religious
instruction for which the Federa tion is responsible. Such instruction is at tended by
more than 4,000 pupils. 4
In the following comments I would like to use developments in Berlin, North Rhine-
Westphalia and Lower Saxony to elucidate the status, models and conceptional basis for
the educational offerings for Muslim pu pils in each case.
2. “ISLAMIC RELIGIOUS INSTRUCTION” – THE ACADEMIC EXPERIMENT IN
LOWER SAXONY
Since the start of the 2003/2004 school year “religious instruction under the purview
of the state” 5 – this being the approach adopted by the Ministry of Culture – has been
offered in Lower Saxony. This aca demic experiment has met with great ac ceptance and
thus was extended to other schools in the 2005/2006 school year. Is lamic religious instruction
is being offered, in German, at a total of 19 primary schools; no grades are given
in this subject. Instruc tion is by teachers who have already – in the context of classes to
teach the heritage language – taught subjects touching on the religion in the land from
which the family comes and who, parallel to their teaching duties, have taken in-service
training to earn supplementary qualifi cation.
Forming the basis for instruction are the “Guidelines for the ‘Islamic religious instruction’
academic experiment”, prepared under the aegis of the Ministry of Culture
for Lower Saxony. It was worked out, however, in “roundtable discussions” in which the
major Muslim organisations and associa tions in Lower Saxony took part. In estab lishing
a “roundtable for Islamic religious instruction” the Ministry of Culture created a body
which, during the academic experi ment, is to function as the “state’s contact in the central
questions of the Islam faith”. 6 The academic experiment has achieved particular signifi
cance and acceptance due to the fact that – in addition to the shura in Lower Saxony
– the Turkish-Islamic Union of the Agency for Religion (DITIB) supports the project.
The academic experiment in Lower Saxony not only enjoys the unreserved approval
of the Christian synods in Lower Saxony but has also attracted a great deal of attention
throughout Germany. This is because the path chosen here achieves the greatest possible
alignment with the requirements of the Constitution (Article 7.3). The Ministry of
Culture at present sees the academic ex periment as the only option since there is no
religious community available for refer ence purposes and there is no “formal proof” of
whether individual children adhere to a particular faith. During the academic experiment
the parents’ or guardians’ en rolling the children in classes is deemed to be evidence
of their association with Islam while the “roundtable” stands in for the missing “offi cial
contact partner”, normally a recognised religious community.
4 In the state of Hesse the Islamic Religious Organisation of Hesse, acting as a “religious community”,
submitted in May of 1988 a petition for the introduction of Islamic religious instruction.
The Ministry of Culture for the State of Hesse rejected the petition. The Islamic Religious Organisation
of Hesse also failed in its suit before the State Administrative Court in Hesse (in a decision
handed down on September 14, 2005) in which it had appealed for recognition as the partner for
Islamic religious instruction. No instruction for Muslim pupils is offered in the federal states in the
territory of the former German Democratic Republic (East Germany).
5 Rolf Bade/Edeltraud Windolph, p. 389. Page 3
6 ibid., p. 390.
169

170
On the conceptualisation of the guidelines
Even though the roundtable participated in the preparation of the guidelines and
al though there appear to be prior drafts which were in part incorporated into the draft,
the state of Lower Saxony alone is responsible for issuing the document. The guidelines
do not represent an intra-Islamic dialogue on the goals and content of Islamic religious
instruction, nor do they document a process in which understanding between the state
and Muslim congregations in Lower Saxony was reached.
The didactic principle of “correlation” is adopted and becomes an objective of instruction:
– The purpose of the academic experiment in ‘Islamic religious instruction’ is to bring
faith and the practice of faith together with the concrete situation and experi ences
of the pupils so that these aspects can reveal and explain each other (cor relation
principle). This eliminates both any blind acceptance and unthinking imitation of
traditional forms for the prac tice of the faith and any unquestioning encounters with
the oral and written tra ditions of the faith. 7
This wording alone shows that – in addition to the fundamental educational objectives
– the academic experiment is of signifi cance to policy making for religious affairs. In
this spirit the experiment has a preventive func tion in so far as certain negative developments
associated with the adoption of Is lamic traditions can be countered both in school
policies and in the didactic aspects with the help of the academic experiment.
Moreover, the academic experiment in Lower Saxony demarcates itself strictly from
“Islamic tuition” as is practised in Ba varia and North Rhine-Westphalia. Instead of “objective
information about Islam”, this is to be religious education in which reli gious questions
are explored “on the basis of the faith”. “In religious education Islam is the object of
both the encounter with faith and the subjective experience; informa tional elements and
an education in reli gious values are equally at home here.” 8
The question of defi ning the content of in struction is answered by the guidelines’
authors in three sequential steps. The starting point is the determination of what is to be
seen as the core of Islam, as the “es sential statements of faith among Muslims”; six articles
of faith 9 and their so-called “visi ble expression”, the fi ve pillars of Islam, are named.
(2) In a further step six topic areas are organised in teaching units which are assigned (in
tables) to the four years of primary school. 10 (3) In the fi nal phase the guidelines formulate
ten mandatory topics; the elucidation of their content makes up the bulk of the text.
Quite apparent here is that the sequences of steps described above are not refer enced
one to another but simply stand, without any correlation, adjacent one to an other, wherein
the focus is clearly on work ing out the mandatory topics.
How can this coexistence of unlinked se quences of steps in three separate systems
be explained? On the one hand, this proce dure refl ects the curriculum work for the fi rst
generation of teaching texts for Islamic reli gious instruction. The emphasis is on constructing
instructional content or, more pre cisely, determining what Islam actually is. It
is only the substantive determination of the nature of Islam which justifi es the new sub-
7 Guidelines for the “Islamic religious instruction” academic experiment, p. 4. See also Annex 1.
8 Heidemarie Ballasch, p. 269.
9 Belief in Allah as the only deity, belief in Allah’s angels, Belief in Allah’s books including
the Koran, belief in Allah’s prophets including Mohammed, belief in the hereafter, belief in divine
providence. cf. Guidelines, p. 5.
10 I and my community, Islam ethics, stories of the Prophet, the Koran, fundamentals of Islam.
cf. Guidelines, pp. 6 f.

ject. The determination of what Islam is to be in schools and instruction takes place, by
contrast, only in a second step. 11 Con versely, the sequences of steps refl ect the creation
process for the guidelines. The preliminary work carried out by the round table presumably
bears the mark of the fi rst two sets of systems 12 while the third set of systems bears
the signature of the Ministry of Culture.
One may observe in general that the guide lines in Lower Saxony focus on the struc ture
and determination of the instructional content. In comparison with the draft cur riculum
from North Rhine-Westphalia there is no explicit didactic substantiation or paths for
accessing the content selected. The mandatory topics also list primarily a cata logue of
subjects without any concrete statements as to objectives and/or direc tions. The way in
which the instructional content is to be linked with the pupils’ lives remains opens and
this is not explored di dactically.
Given the lack of a system of didactics for Islamic religion instruction, the practice in
the real classroom situation is an open-ended experimental fi eld. Until such time as independent
Islamic religion didactics have been developed the following applies in practical
teaching: “The implementation of the guidelines is thus based on general di dactic skills
and didactic knowledge of Protestant or Catholic religious instruction as it relates to the
subject at hand”. 13
In providing for scientifi c review of the ex periment, Lower Saxony has created an
instrument which will make clear to an in terested public both the successes achieved and
any as yet unsolved prob lems.
3. “ISLAMIC TUITION” 14 IN NORTH RHINE-WESTPHALIA
The states of Bavaria and North Rhine-Westphalia had in the 1980s already insti tuted
on a broad scale “religious tuition” for Muslim pupils within the framework of in struction
in their “heritage language” (i.e. the language spoken in the home). Teach ing in Bavaria
was in accordance with cur ricula prepared by the Turkish Ministry of Education while
North Rhine-Westphalia worked out its own curriculum. Both of these states are now offering,
in accor dance with these concepts, Islamic tuition in German for Muslim pupils.
In North Rhine-Westphalia this has been the case since the 1999/2000 school year, in
Bavaria since the 2001/2002 year. With this concept of Islamic tuition both states have
adopted a course of offering religious studies for which the state alone is responsible, this
in the place of religious instruction [under the ae gis of the religious communities]. Thus
an offer is to be made for Moslem pupils until such time as the constitutional prerequisites
for Islamic religious instruction have come into being. In the view of the state governments
there is no partner in the Muslim community with which to achieve any kind of
organised cooperation in line with Article 7.3 of the Constitution. The Muslim um brella
11 With this argumentation I am following the comments of Irka-Christin Mohr, who on 25
March 2006 presented her critical analysis of the guidelines at a meeting in Loccum called to draw
up “an interim balance sheet” on the academic experiment in Lower Saxony.
12 The structure and elaboration of the six topic areas are oriented on the curriculum for Islamic
religious instruction published in 1999 by the Central Council of Muslims in Germany. Compare
in this regard the instructive analysis in the work by Irka-Christin Mohr, pp. 43 ff.
13 Heidemarie Ballasch, p. 270.
14 Since March 1, 2005, “Islamic tuition” has been renamed “Islamic studies” in the state of
North Rhine-Westphalia.
171

organisations in North Rhine-West phalia see this quite differently and are ap pealing to
the courts to acquire recognition as a religious community.
In North Rhine-Westphalia the content of instruction in the new subject is based on
work carried out by curriculum commissions whose composition and methods have set
new standards. In these commissions, chaired by a representative of the school administration,
Turkish teachers, scholars of Islam and religion educators worked out drafts
which were discussed exhaustively with Islamic congregations and associa tions. In the
later course of the process contact was made, and concurrence achieved, with Islamic
theological faculties, with the Offi ce of Religious Affairs in Turkey and with the German
representatives of the Muslim World Congress. One may say that the curriculum work to
date – organised in teaching units 15 – has achieved a degree of recognition within Islamic
academic theol ogy circles to which the drafts for Islamic religious instruction submitted
by the large umbrella organisations 16 can lay no claim. 17 To this extent the term “religious
studies”, as provided for in school legislation, is in deed formally correct. In terms of
curricu lum and didactics, however, the envisioned instruction adopts the principle of
correlat ing the tradition of the faith with the real-world environment of Muslim pupils.
Thus the point of view held in “mere” religious studies has clearly been exceeded. 18
The Christian churches in North Rhine-Westphalia have expressed criticism of the
new subject and have spoken out in favour of religious instruction as per Article 7.3 of
the Constitution. Thus they concur with the opinions put forth by the Central Muslim
Council and the Islamic Council. Both um brella organisations have fi led suit against the
Ministry, petitioning for the introduction of Islamic religious instruction.
At fi rst glance the academic experiment in North Rhine-Westphalia would appear to
be a pragmatic attempt, under the conditions currently prevailing, to ensure an appropriate
educational option for Muslim pupils, giving Islam a place in the school and thus
being of great signifi cance in regard to inte gration efforts. In the course of installing the
new subject in the schools, however, de marcation from Christian religious instruc tion
and, in particular, the non-involvement of the Islamic organisations and associa tions in
the design and conduct of instruc tion have proven to be ever more problem atic. Thus an
interim review of the aca demic experiment says that, “Two matters – the question of the
infl uence of the [Muslim] organisations and a clearly defi ned asso ciation of the subject
with religious educa tion in public schools – are in urgent need of settlement.” 19
The pronouncement handed down by the Federal Administrative Court in Leipzig on
February 23, 2005, lent a new quality to the legal battle conducted by the two umbrella
organisations – the Central Muslim Council and the Islamic Council – with the state of
North Rhine-Westphalia, aiming to achieve recognition as a religious community. The
court set aside the December 2, 2003, judgement of the Superior Administrative Court
and returned the case for new hear ings. Signifi cant in the Federal Court’s sub stantiation
is its determination that umbrella organisations can most surely be taken into consideration
for classifi cation as religious communities if they discharge the essential functions
15 The State Institute for Schools and Continuing Education in Soest has published separately
the results for the elementary school, grades 5 and 6, and for grades 7 to 10.
16 cf. the “Curriculum for Islamic religion teaching (primary school)” published by the Central
Muslim Council (ZMD) in March 1999.
17 cf. Johannes Lähnemann, pp. 313 ff.
18 cf. Klaus Gebauer, pp. 49 ff.
19 Eckhart Gottwald / Dirk Chr. Siedler, p. 13.
172

which characterise religious communities. A court will have to decide anew whether this
defi nition applies to the Central Muslim Council and the Islamic Council. 20
The draft curriculum for Islamic religious studies, of July 2005
Last summer the State Institute for Schools published a new draft for Islamic religious
studies as a school subject. The objective for this subject is defi ned as follows:
– Schooling in Islamic studies is not reli gious instruction as is understood by the established
Christian churches. The course in Islamic studies informs pupils about Islam,
drawing upon pupils’ and teachers’ Islamic faith, and thus contrib utes to the pupils’
forming personal iden tities. 21
Just these two sentence make it clear that the draft is to continue the direction fol lowed
in previous curriculum development for the subject. At the formal level the char acter of
the subject as Islamic studies is retained but any “impartial” conveyance of knowledge
about Islam is excluded at the didactic level. At the same time the correla tive approach
is maintained in so far as the pupils are to achieve, in their classes, the ability to “put the
basic traditions of the Ko ran and Sunnah in relation to their own ex periences in their
own environment and to the experiences of other people”. 22
The Koran, the Sunnah and the texts of the law schools are cited as the three major
reference sources for the Islam religion. However, the contents of “Islamic studies” are
not derived from the traditional materi als. Instead, substantive content or topics become
subjects for instruction only when they can be linked with a didactic question or perspective.
With this fundamental di dactic orientation, “real-world topics will be (worked
through) in the context of a certain question or perspective which is also to be carefully
selected and considered”. 23
The draft is attractive in the way in which it was successful in opening up “thematic
units” that consider the perspectives of “everyday life in Germany” and the “fundamentals
of Islam”, these being subdivided into the fi elds of “our surroundings in our
personal experiences”, “obligations, wor ship and customs” and “religious knowl edge”.
The guiding principles – following the “worlds of learning” principle and the de termination
of “thematic fi elds” – result in a multi-perspective consolidation in “thematic aspect fi elds”.
Overall, the didactic profi le applied to the curriculum is derived and substantiated in a persuasive
fashion. In the plethora of these aspect fi elds there is little clarity as to which points
of access to Islamic theology and the tradition of the faith result from the concrete content
choices – e.g. the selection of the surahs, stories of the Prophet etc. At the same time, using
the acronym WTN (words – terms – names) implies prejudicial decisions and these are neither
disclosed nor substanti ated by the authors. The Islam faith – the content of instruction
– thus appears to be an apparently “objective” and immutable magnitude; the only decisions
made are in regard to the didactics used to give access to Islam. 24
It is thus hardly to be expected that the Is lamic associations see themselves represented
in the new curriculum.
20 cf. Andreas Gorzewski, pp. 12 ff.
21 Draft Curriculum, Islamic studies in German in the Primary School, Grades 1 – 6, p. 6.
22 Draft Curriculum, p. 10.
23 Draft Curriculum, p. 18.
24 One has to admit that a reader not familiar with the subject would arrive at the same conclusion
upon reading a Protestant or Catholic curriculum. The difference does nonetheless continue
to exist: the theological content was not selected without the assent of the churches.
173

174
4. ISLAMIC RELIGIOUS INSTRUCTION IN BERLIN
In Berlin – deviating from the precepts ex pressed in Article 7.3 of the Constitution
– there is a scheme for religious instruction which places the subject under the sole responsibility
of religious or philosophical communities. Religious instruction is an elective
subject which is a “matter of the churches and religious and philosophical communities”
(Article 13 of Berlin’s School Law). Parents have to register their children for religious
instruction and, once they have turned 14, the pupils themselves decide whether they
wish to participate. The deci sions on the principles to be taught, the cur ricula and the
teaching materials are exclu sively within the purview of those who offer the subjects
and they alone are responsible for appointing teachers to give instruction. 25 At present
religious and/or philosophical instruction is being provided by the Protes tant and Catholic
churches, the Jewish congregation (at one school location) and the Humanist Association,
which offers classes in humanist “theory of living”. With the 2000/2001 school
year a new “pur veyor” appeared on Berlin’s “school relig ions market”. 26 As the result of
lengthy litigation and pursuant to the fi nal decision of the Federal Administrative Court
(on February 23, 2000) the Islamic Federation of Berlin 27 was afforded the privilege of
giving Islamic religious instruction in public schools in Berlin.
This judgement triggered animated public discussion since the Islamic Federation,
an organisation demonstrably sympathising with the “Islamische Gemeinschaft – Milli
Görüs e.V.”, 28 was legitimised as a provider of religious instruction. Milli Görüs is a group
which the Offi ce for the Protection of the Constitution characterises nation-wide as being
an extremist Islamist organisa tion. 29 That is why the Islamic Federation is also much disputed
within Berlin’s Muslim community, as well. It remains to be noted that the recognition
of the Islamic Federa tion as a religious community was effected only on the basis of
school legislation spe cifi c to Berlin. An examination of a judicial defi nition of “religious
community” as per Article 7.3 of the Constitution was not pos sible, this being due to the
particular legal situation in Berlin. 30
The Islamic Federation has in the meantime expanded Islamic religious instruction to
include 37 schools and in the 2004/2005 school year reached more than 4,000 pupils with
its voluntary courses. Instruction is given in German by the Federation’s own instructors
on the basis of a curriculum – the “Temporary Framework Plan for Islamic Religious
Instruction in the State of Berlin” (grades 1 to 4). The Federation had to submit the framework
plan to the Berlin Senate’s Administration for examination. The objections of the
school administration in regard to how instruction is to be pre sented were of no effect
25 For information on the history and current situation see Friedhelm Kraft, pp. 159 ff.
26 In addition, Alevi religious instruction is offered at a few schools and Buddhist instruction
is provided at one school site.
27 The Islamic Federation presents itself to the public as an independent, regional representative
of all Muslims in Berlin. It was founded in 1980 as an umbrella organisation. The 26 member
associations include in fact only Turkish-Islamic groups.
28 The Islamic Federation has also defended itself in the courts against this claim. At the very
least some persons are members of both organisations and this fact is no longer being contended
by the Federation.
29 cf. the study by Thomas Lemmen, published by the Friedrich Ebert Stiftung, pp. 40 ff.
30 Consequently Berlin’s governing Senate, in the new version of the School Law (adopted on
August 1, 2005) defi ned more precisely in Section 13, Paragraph 1, its understanding of a religious
community.

since, due to the legal situation in Berlin, the school admini stration may examine the curriculum
only for conformity with the Constitution and may not intervene in the concept
for the contents of the instruction. 31
On the formulation and conceptualisation of the curriculum
The history of the draft curriculum mirrors the fundamental diffi culties inherent to
the course chosen for Berlin. The Islamic Fed eration fi rst attempted to prepare a draft on
its own accord but, once interim results were available, abandoned this course. In a second
step it commissioned the Institute for Interreligious Pedagogy and Didactics (IPD)
to draft a curriculum. The Islamic Federation was obviously not successful in joining Islamic
theological perspectives with pedagogic and didactic needs. 32 The draft was instead
characterised by a compilation of Islamic materials and topics and thus corresponded,
in respect of its structure, to classical curricula which – and not just for the subject of
religion – were common in the 1950s. A positioning of Islamic religious instruction – in
terms of didactics and cur riculum – for use as instruction in Berlin’s schools and for Berlin’s
children was not provided for.
With the selection of the institute in Cologne the Islamic Federation had turned to an
in stitution that is also considered to be within the Milli Görüs network. The IPD staff at
Cologne do, however, adhere to a concept of Islamic religious instruction which adopts the
principle of correlation with the child’s environment. At the centre is the develop ment of
“Koran-referenced didactics” that pursue the goal of establishing a relation ship between
the texts of the Koran and the children’s own lives. But by selecting the IPD as its partner in
these efforts, the Is lamic Federation had manoeuvred itself into an inconsistent situation.
On the one hand it had made use of the pedagogic orientation of the curriculum to attain
public accep tance of its instruction. On the other hand the Federation’s understanding of
the Ko ran is not in alignment with the IPD’s ap proach to interpretation. 33
As a consequence the curriculum promul gated by the Islamic Federation of Berlin is
distinguished by the following characteris tics:
As regards the guiding tenets for instruc tion, there is a focus on pedagogic objectives.
Education in the interest of achieving “tolerance as a matter of course”, stimula tion
for “personal decision-making proc esses”, distancing itself from “any and all missionary
character” are formulated as the pedagogic guidelines for instruction that is to be dialogue-driven
and oriented on the experiences of Muslim pupils. An obvious feature in
the curriculum is, however, that surahs from the Koran are cited throughout or reference
is made to relevant points in the Koran. Comments on Koran-related di dactics or indeed
on Koran-related herme neutics are not made. Thus the concrete manner in which the
texts of the Koran are to be handled during instruction is left un addressed; the intended
reference to the children’s environment is not evident. The Federation represents instead
the view that the Koran texts selected can be understood clearly and unequivocally on
31 Criticised by the Senate’s School Administration was the fact that the educational objectives
listed were, in character, only declarations of intent since they were not cast in didactic plans. In
regard to the following see the excellent study prepared by Irka-Christin Mohr, pp. 123 ff.
32 The author participated in the assessment of the draft in the spring of 1999.
33 Cooperation between the Islamic Federation and the IPD was terminated shortly after the
publication of the curriculum. Following an initial phase of cooperation, the Federation took control
of training for its teachers of religion and for the preparation of teaching materials.
175

their own and that consequently no “interpretation” is re quired. What is found, instead
of interpreta tion, is promulgation of an “immutable” body of knowledge and this is associated
with the promulgation of the “proper” attitudes.
Since Berlin’s school administration has no infl uence on the content of religious
instruc tion – it cannot exercise oversight analo gous to that for a “standard subject” – it
re mains unclear which pedagogic-theological standards actually apply to instruction and
in particular which “interpretations” the chil dren are in fact to assimilate. The instruc tors
are chosen by the Islamic Federation and receive in-service training conducted internally
by the Federation. The school authorities examine only the fi tness of teachers (in regard
to their allegiance to the Constitution) and proof of educational qualifi cation.
176
5. CONCLUSIONS
With a view toward the models and paths described here, aiming to establish religious
education for Muslim pupils in German schools, the following can be ascertained:
– It is only to a limited extent that the con crete curricula can be subsumed under the
categories “religious studies” or “reli gious instruction”. Instruction given by Muslim
teachers and which is to have integrational and identity-building effects will always
be more, in terms of didac tics, than mere “studies”.
– The view of the guidelines presented here shows that Islamic religious instruc tion
makes necessary “religious and theological positioning” (Irka-Christin Mohr) for
Muslims in Germany. Concen tration on designing the content of in struction while
neglecting didactic ac cess can be interpreted as an attempt to effect this “positioning”
and forms a characterising feature of the fi rst-gen eration of guidelines.
– In view of the decentralised structure of Islam, the question of Muslims’ partici pation
in the academic experiments and/or the subjects instructed in school continues to
be the decisive challenge. Since no general solutions are in sight, it is possible only
to embark on individual courses of action in the various states. A key role here is
assumed by that asso ciation of Muslims in Germany which has the largest number
of members – the Turkish-Islamic Union of the Institution for Religion (DITIB). As
a Turkish over seas organisation it enjoys a special po sition in comparison with the
other um brella organisations. Moreover, offi cial statements are often characterised
by a claim to sole authority for representing Muslims; cooperation with other Islamic
associations is limited. Thus the course adopted in Lower Saxony could, in this spirit,
also serve as a model for further cooperative efforts. Particularly the ex ample in Berlin
shows that the “power of defi nition” in regard to Islamic religious instruction may not
be assigned to a sin gle Islamic association.
– In Lower Saxony the Ministry of Culture has taken the initiative and has outlined
a pragmatic course for Islamic religious instruction, and one with a clear mission
statement.
The encouraging results of the academic experiment already show that transitional
solutions are required in order to ensure Muslim pupils their “right to religion” in the
schools. The question here is less one of how long these “transitional periods” might last.
Far more important is laying the groundwork that will make Islamic religious instruction
possible in future in compliance with Article 7.3 of the Constitution. The fact that Muslim
associations are currently reorganising may be seen as a progressing institutionalisation

of Islam in Germany. And in spite of this it continues to hold true that the question of
Islamic religious instruction is primarily a question of school policies and less one of the
politics of the various associations.
ANNEX 1: STRUCTURE OF LOWER SAXONY’S FRAMEWORK DIRECTIVES
Setting educational outcomes as part of Lower Saxony’s Framework Directives
The directives state the following key objectives for Islamic religious studies:
– Looking at existential questions as to where we come from and where are we going
and as to the meaning and purpose of human existence;
– In line with the pupils’ age, looking at faith, written testimonies, traditions and customs
as well as where the faith comes from and its effects in the course of its history;
– Looking at one’s own religion. 34
The directives emphasize that:
“ (..) Religious Islamic studies (are about) the encounter with and refl ection on faithrelated
experience and faith-related practices; the classroom is not the place for practising
one’s faith. 35
In contrast, the syllabus drawn up by Central Muslim Council of Germany aims at instruction
in faith. The study area “the Koran”, for example, states the following aim:“The
effects of the language of the Koran on people’s emotions and their sub-conscience shall
be used and promoted by using recitations from the original text in Arabic.” 36
Instead of aiming at instruction Lower Saxony’s directives aim at refl ection:“In order
to illustrate the effect of the language of the Koran on people’s emotions and on
community structures excerpts from the original text in Arabic may be used by way of
example.” 37
In addition, those responsible for setting the curriculum in Lower Saxony inserted a
“negative outcome”. It states explicitly what must be avoided:“It shall be ruled out that
traditional forms of practising the faith be blindly taken on or imitated without refl ection
and that oral or written traditions be looked at without questioning.” 38
As a method and a didactic principle to overcome such blind acceptance of faith and
imitation without refl ection the framework directives state a correlation according to which
“faith and the practice of faith should be linked to the realities of life as pupils experience
them so that both aspects may be explained and developed in that correlation” 39 .
This critical and productive correlation between religious traditions and the experience
of people of today shall ensure that children are in a position to question traditional attitudes
(including those of their parents).
34 see ibid., p. 4 ff.
35 Ibid., p. 6.
36 Central Muslim Council of Germany (editor): Syllabus for Islamic religious tuition (primary
schools), p.5.
37 Lower Saxony’s Ministry for Education (editor): Framework directives for the educational
model “Islamic religious tuition”, p. 7.
38 Ibid., p. 4.
39 Lower Saxony’s Ministry for Education (editor): Framework directives for the educational
model “Islamic religious tuition”, p.4.
177

178
The three systematic approaches of the framework plan
1. Systematic approach
The formulation of study areas is based on what is defi ned as the core of Islam, the
important statements of Muslim Faith: the 6 articles of faith and their so-called visible expression,
the 5 pillars of Islam. The 6 articles of faith are: the belief in the One God (Allah); the
belief in His Angels; the belief in His Books, the belief in His Prophets and Messengers
(including Mohammed), the belief in Judgement Day (and life after death) and the belief
in God’s Divine Decree. The 5 pillars are: witnessing (Shahadah), prayer (Salat), fasting
(Sawm), charity (Zakah) and pilgrimage (Hajj).
The framework directives base their defi nition of Islam on these six articles and 5
pillars (6+5).
2. Systematic approach
Here the following 6 topics are introduced:
– My community and I
– Islamic ethics
– Stories of the prophets
– The prophet Mohammed
– The Koran
– Principles of Islam 40
These six topics are in turn subdivided into various sub-topics which are assigned to
the 4 years of primary schooling by using table. The second systematic approach is aimed
at fl eshing out the fi rst one:“The important statements of faith as well as their visible expressions
and interpretations will be dealt with in the following six topics.” 41
The study areas of the 6+5 are, however, are only resumed under the 6 th topic: Principles
of Islam. This in fact means that the fi rst and the second systematic approach only
come together in the overlap of issues as part of the 6 th topic.
3. Systematic approach
As part of a third appoach the directives state 10 so-called compulsory themes. They
are fl eshed out in the main part of the document which is 36 pages long and are covered
in pages 12 to 33. The following compulsory themes are dealt with in two pages each:
Allah
Allah’s creation
The Koran
The prophet Mohammed
The prophets
Prayer
Fasting
Living together in the larger community
The Community of Muslims
Encounter with other religions. 42
40 Ibid., p. 6 ff.
41 Ibid., p. 5.
42 Ibid., p. 12.

BIBLIOGRAPHY
Bade, Rolf/Windolph, Edeltraud: “Islamischer Religionsunterricht – ein niedersächsischer
Schulversuch”, in SVBl 12/2003.
Ballasch, Heidemarie: “Auf dem Weg zum Islamischen Religionsunterricht – der Schulversuch
in Niedersachsen”, in SchulVerwaltung NISH, No. 10/2005.
Gebauer, Klaus: “Islamischer Religionsunterricht?”, in Pädagogik, No. 10/98, pp. 49 ff.
Gorzewski, Andreas: “Mit einer Stimme sprechen. Islamische Verbände wollen als Religionsgemeinschaft
anerkannt werden”, in Zeitzeichen, 11/2005, pp 12 ff.
Gottwald, Eckhardt / Siedler, Dirk Chr. (ed.): “Islamische Unterweisung” in deutscher
Sprache. Eine erste Zwischenbilanz des Schulversuchs in Nordrhein-Westfalen. Neukirchen-Vluyn,
2001.
Kraft, Friedhelm: “Religionsunterricht in Berlin - der öffentliche Streit um das von
den Kirchen vorgeschlagene Konzept der Fächergruppe”, in Doyé, Götz / Kessler,
Hildrun(ed.): Konfessionslos und religiöse. Gemeindepädagogische Perspektiven. Leipzig,
2002.
Lähnemann, Johannes: Evangelische Religionspädagogik in interreligiöser Perspektive. Göttingen,
1998.
Lehrplan-Entwurf Islamkunde in deutscher Sprache in der Grundschule Klasse 1 – 4, Landesinstitut
für Schule, dated July 7, 2005.
Lemmen, Thomas: Islamische Vereine und Verbände in Deutschland. Bonn, 2002.
Mohr, Irka-Christin: Islamischer Religionsunterricht in Europa. Lehrtexte als Instrumente muslimischer
Selbstverortung im Vergleich. Bielefeld, 2005.
Rahmenrichtlinien für den Schulversuch “Islamischer Religionsunterricht”, Ministry of Culture
for Lower Saxony, May 2003.
Stock, Martin: Islamunterricht: Religionskunde, Bekenntnisunterricht oder was sonst? Münster,
2003.
Vorläufi ger Rahmenplan für den islamischen Religionsunterricht im Lande Berlin (Klassenstufen
1 – 4). Islamic Federation of Berlin, April 2000.
Central Council of Muslims in Germany (ZMD): Lehrplan für den Islamischen Religionsunterricht
(Grundschule), March 1999.
179

Democracy – Germany –
European Union

DEMOCRACY IN THE ASCENDANT?
Marika Lerch
This article authored by Marika Lerch was originally published by Friedrich-Ebert-
Stiftung, Department for Development Policy, Berlin, 2007
ABSTRACT
At the beginning of the 21st century the world is freer and more democratic than
ever before. The external promotion of democracy has been thriving for years. Yet the
trend towards a democratic world is full of contradictions. The vast majority of states that
have introduced reform processes over the past 30 years are anything but consolidated
democracies. The transformation landscape is dominated by defective democracies and
semi-authoritarian regimes. The conditions for a successful transformation in many of
the authoritarian regimes still in place are extremely unfavourable. At the same time the
balance of forces is shifting to the disadvantage of the old democracies. Authoritarian
regimes are exploiting this to roll back international efforts at democratization on the
legal and diplomatic fronts.
Their success or otherwise in curtailing the scope for international action in support
of democracy for any length of time will strongly infl uence the prospects of democratic
advances being made over the next 15 years. Other important factors are military confl
icts, the attitude of regional hegemonic powers and success in achieving redistribution
by means of development processes. Only if several favourable conditions coincide is
the “normative power of democracy” likely to succeed in triggering a further positive
trend with signifi cant progress towards democratization by 2020. If democracy remains
just an international norm, while structural hurdles and confl icts block political reforms
at national level, there is a danger of “decoupling”. Although more and more states recognize
democratic principles as part of “world culture”, they do not fully implement
them. In the long term the contradiction between discourse and practice will create an
unstable situation. The worst-case scenario would be the emergence of a strong coalition
of authoritarian states opposed to the concept of “liberal democracy”. Such a “polarization”
would cause the struggle for zones of infl uence to intensify in the name of different
interpretations of democracy.
Germany’s long-term interest in a democratically ruled world, along with its international
obligations, indicates that democratization remains an important aim of German
foreign policy. The conditions for success, however, are becoming more diffi cult, while
contrary interests are growing in infl uence. Democracy promotion should therefore be
more strongly anchored in the institutional structure of German foreign policy.
At the international level the Federal Republic of Germany, because of its multilateral
tradition, is predestined to form broad alliances for the promotion of democracy. Trade
and economic relations should be systematically geared to the inclusion of broad social
strata. In the process of further developing the toolbox of political instruments, it will be
necessary to develop suitable political approaches for authoritarian states as well.
183

184
I. “UNFINISHED BUSINESS” – THE CONTEXT OF DEMOCRACY PROMOTION
AFTER THE “THIRD WAVE”
I.1 More democracy, more democracy promotion
At the beginning of the 21st century the world is freer and more democratic than ever
before. In 2005, according to the classifi cation used by the U.S. organization Freedom
House, almost two-thirds of all states (123 out of 192) are considered to be “electoral democracies”.
This marks a historical highpoint and a signifi cant increase since 1974, when
less than a third of all states qualifi ed as “electoral democracies”. 1 The number of “liberal
democracies” adequately guaranteeing civil and political freedoms over and above the
right to vote more than doubled between 1974 and 2003 – from 32 to 76. 2 Overall the
protection of civil and political rights has signifi cantly improved. 3
The “third wave of democratization”, a term used by Samuel Huntington to describe
the striking spread of democracies that began in 1974 with the democratic revolution in
Portugal and accelerated with the collapse of the Soviet Union, has not been without its
effect on international relations. The strengthening of the democratic camp in international
organizations and the weakening of communism as an alternative ruling ideology
have enabled democracy and human rights to gain new status as global points of reference
for modern statehood and legitimate rule. The representatives of the states attending
the UN Millennium Summit in September 2000 unanimously pledged “to promote
democracy and strengthen the rule of law, as well as respect for all internationally recognized
human rights and fundamental freedoms, including the right to development”.
Democracy promotion by the OECD countries, i.e. supporting processes of political
opening and democratization by transferring ideas and norms as well as committing
material, organizational and (in exceptional cases) military resources, has experienced a
boom since the early 1990s. The political upheavals of 1989 expanded the scope for intervening
in political power struggles beyond national borders. Relations with numerous
developing and emerging countries were (temporarily) freed from the corset of geostrategic
considerations. The states of the former East bloc offered a whole new terrain that
was open to democracy promotion and Western infl uence. The positive measures were
considerably expanded. According to rough estimates, about 10% of all public spending
on development aid in the 15 years after the end of the East-West confl ict was used for
democracy, human rights and good governance. 4 At the same time, political conditions
have become a standard element of development co-operation due inter alia to increasingly
tight budgets and the need for greater effi ciency. For while the academic debate
continues about the advantages democracy brings for growth and development, it has
become generally accepted in the offi cial political discourses of the donor nations that
1 For these fi gures see www.freedomhouse.org and Larry Diamond: The State of Democratization
at the Beginning of the 21st Century, in: The Whitehead Journal of Diplomacy and International
Relations, Winter/Spring 2005, pp. 13-18.
2 This calculation assumes a minimum score of 2 in the Freedom House index for civil and political
freedoms (cf. Diamond (footnote 1), p. 16. The scores range from 1 (most free) to 7 (least free).
3 In 1974 the average global score for all states rated by Freedom House for civil and political
rights was 4.47, while in 2002 it was 3.38 (Diamond (footnote 1), p. 15).
4 Peter Uvin, 2004, quoted in Massimo Tommasoli: Democracy Building and the Political Dimensions
of Development, in: International Institute for Democracy and Electoral Assistance: Ten
Years of Supporting Democracy Worldwide, Stockholm: IDEA, 2005, p. 30.

accountable, and if possible democratic, governance is a precondition for the effectiveness
of development aid.
Many young democracies in the countries of the southern hemisphere also added the
dissemination of democratic values to their foreign policy agenda in the 1990s. 5 The most
infl uential actors, however, continue to be the U.S.A. and the European Union, which can
combine a democratic value system with political leverage.
However, for all the differences they may have, it holds for both the U.S.A. and the EU,
especially the larger of the latter’s member states, that the quantitative and qualitative
increase in programmes and initiatives has not done away with the inherent weakness
of human rights and democracy policy, which is its lack of coherence and consistency.
Democracy is only one among many foreign policy goals and one that is at a structural
disadvantage when it comes to confl icts of interest. First of all, promoting democracy
is a “laborious business”, 6 which can in the short run entail enormous costs (instability,
worsening of bilateral relations), whereas investments usually take many years to
pay off. Given the numerous variables infl uencing democratization processes, the consequences
of political interventions are hard to calculate. The desired elections may bring
forces to power that have an ambivalent attitude to liberal democracy, an ethnic or tribal
agenda, or a commitment to aims which confl ict with the core foreign policy interests
of democracy promoters (such as Hamas in Palestine or Chavez in Venezuela). This risk
can be reduced but not eliminated by infl uencing the date of the elections (especially in
post-confl ict states) and supporting the liberal forces. Secondly, promoting democracy is
an abstract and thankless task which does not arouse much domestic enthusiasm in the
countries practising it. Thirdly, although the lobby for human rights and democracy is
growing, it is still weak in relation to the advocacy of economic interests. Consequently,
policy is characterized – to varying degrees depending on the donor country – by political
compromises, paradoxes, and incoherence. 7 In the case of the EU, internal confl icts of
interest and the different colonial legacies of the member states are additional factors.
The priority of other short-term interests and the principle of consensus also weaken
the capacity to act of the international organizations that actively promote democracy.
Nevertheless, the growth in multilateral activities is remarkable. In the 1990s,
the Council of Europe and the OSCE took an active interest in democratic transformation
processes in Central and Eastern Europe and acted as important forums for
multilateral negotiations, albeit without strong leverage on governments unwilling to
reform (e.g. Russia, Belarus). In Latin America, the Organization of American States
(OAS) pioneered the formulation of democratic principles as a constitutive element of
regional co-operation. More recently, monitoring and sanction mechanisms have been
developed in the British Commonwealth and the African Union. A major innovation is
the New Partnership for Africa’s Development (NEPAD) with its “African Peer Review
Mechanism” aimed at the mutual examination and formulation of recommendations
by the participating transformation countries in Africa. However, the political and institutional
conditions for an effective democratic regime in Africa do not exist as yet.
5 Robert G. Herman/Theodore J. Piccone (eds.): Defending Democracy. A Global Survey of
Foreign Policy Trends 1992-2002, Democracy Coalition Project, 2002.
6 Friedrich Ebert Foundation: Das mühsame Geschäft der Demokratieförderung. Konzepte
und Erfahrungen aus der Internationalen Entwicklungszusammenarbeit der Friedrich-Ebert-Stiftung,
Bonn 1999.
7 For a systematic evaluation see Hermann/Piccone (footnote 5).
185

The weakest areas in the network of regional democratic regimes are Asia and the
Near and Middle East. A list of documents from international organizations on the
strengthening of democracy drawn up by the Offi ce of the UN High Commissioner for
Human Rights (OHCHR) contains 73 entries, of which there are only three from the
Arab world and none at all from Asia.
UN activities (election monitoring, promoting programmes and projects, decisions
by political bodies on democratic standards and rights of intervention) have also become
broader and more high-profi le. The policy of the United Nations, however, continues
to be largely shaped by countries that are not democratically organized and have no
interest in a policy of active democratization. The result has been the formation of a
Democracy Caucus within the UN and the founding of the Community of Democracies
as a partial community which, unlike the UN, defi nes itself in terms not of the principle
of sovereignty, but of democratic rule, and which may be regarded as the organizational
platform of a global democratic regime with a potentially global reach. In the Warsaw
Declaration of 2000, the members pledged not only to consolidate democracy in their
own countries, but also to raise democracy promotion to a normative postulate of their
foreign relations. 8
Neither the World Bank nor the International Monetary Fund (IMF) is allowed to
award loans based on political criteria. Since the 1990s, however, wielding the banner of
“good governance”, the World Bank has in fact been giving consideration to such core
elements of the political system as the accountability of the executive, transparency and
the rule of law. The Poverty Reduction Strategy Papers introduced in 1999, which are a
prerequisite for debt relief and concessionary loans as well as subsidies to the poorest
developing countries, must be drafted in a participatory process with the involvement
of civil society. However, the decision-making scope of the recipient countries is still
limited, as the national negotiation process is overshadowed by the power of the donor
institutions. The quality of participation varies greatly from country to country, but it can
contribute to the empowerment of non-governmental organizations.
As a good deal of the funds devoted to democracy and human rights is channelled via
non-governmental organizations, the latter have also profi ted from the boom in democracy
promotion. On the other hand, some actors which are largely independent of state
funding, such as Amnesty International and the Soros Foundation, are themselves global
players that infl uence not only practical activities, but also the international debate on
democratization policy.
In general, the number of actors engaged in democracy promotion has greatly increased
in recent years and their roles have become more diversifi ed. On the one hand
this has aggravated the problem of co-ordination, while on the other it has opened up
new possibilities of access to political reform processes.
186
I.2 Headwind and hangover: current challenges to democracy promotion
Although the status of democracy as an international norm, political system and foreign
policy goal has been considerably boosted, the political and especially the academic
debate on the prospects of a democratically ruled world is currently marked by scepticism.
In many places it is proving diffi cult to consolidate democratization processes,
8 Cf. Ministerial Conference Final Warsaw Declaration: Toward a Community of Democracies,
Warsaw, Poland, June 27, 2000.

while the prerequisites for transition in the remaining authoritarian states are not very
favourable. All in all, there are more negative than positive trends at present; they constitute
the challenges that will need to be addressed in the years ahead.
Hard cases
Since the end of the 1990s many reform processes have begun to fl ag. The relative
proportions of free, partly free and not free states (to use Freedom House terminology)
are largely static. Furthermore, the progress made towards transformation has been very
unevenly spread by region. The hard cases of authoritarian states in the Middle East,
Africa and Asia have been left to the 21st century.
Liberalization/democratization by region, 2005 (as rated by Freedom House)
Region
Percentage (number)
of electoral
democracies
Percentage (number)
of free states
Percentage (number)
of partly free states
Percentage of not
free states
Western Europe 100% (25) 96% (24) 4% (1) 0%
America 94% (33) 69% (24) 26% (9) 6% (2)
Eastern Europe
(incl. CIS-states)
63% (17) 48% (13) 26% (7) 26% (7)
Asia 59% (23) 41% (16) 31 (12%) 28% (11)
Sub-Saharan Africa 48% (23) 23% (11) 48% (23) 29% (14)
Middle East and
North Africa
6% (1) 6% (1) 33% (6) 61% (11)
Source: Arch Puddington: Freedom in the World 2006: Middle East Progress Amid Global
Gains, Freedom House Essay. 9
Some of the not free states are rentier economies that are threatening to stray from
the path of liberalization into “dead ends of transition”. 10 Many of these countries lack
strong democratic forces that external promoters of democracy could back. When it
comes to economic reforms, patrimonial networks often prove to be very persistent. This
results in “defective market economies” in which the political and economic classes are
closely intertwined. A second group of hard cases is made up of states with an extremely
low level of development and barely functioning or even disintegrated state structures.
In cases where the latter applies, democracy promotion goes hand in hand with state
building and nation building, which in themselves are long-term and resource-intensive
processes requiring a massive international presence.
In many of the remaining not free countries these internal structural diffi culties are
accompanied by regional obstacles to democratization, such as hegemonic powers with
authoritarian systems or tendencies (e.g. China, Russia) and confl icts with a regional dimension
and transnational movements of refugees (e.g. Iraq, Lebanon, Israel/Palestine,
Congo, Sudan).
9 http://www.freedomhouse.org/template.cfm?page=130&year=2006.
10 Michael Dauderstädt/Arne Schildberg (eds.): Dead Ends of Transition. Rentier Economies
and Protectorates, Frankfurt am Main: Campus, 2006.
187

Predominance of the grey zone
The above table also shows that the category of elective democracy is a deceptive
one, since in most regions the number of free states in which political and civil rights are
respected is much lower. This phenomenon is a result of the uncompleted “third wave” 11 .
Only in a minority of cases have initial steps towards liberalization and the holding of
reasonably free and fair elections led to consolidated democracies. The great majority
remain in a grey zone between autocracy and democracy. In the “defective democracies”
the principle of popular sovereignty is institutionalized by elections, while other conditions
necessary to a functioning democracy are missing. 12 Thus the boundaries between
these democracies and moderate autocracies, competitive authoritarianism 13 or semi-authoritarian
regimes, 14 which deliberately introduce liberal institutions in doses so as not
to endanger their own power, are fl uid. Even more diffi cult than classifying the various
hybrid regimes is assessing how they are going to develop. Even in states that have been
given the label of a (defective) democracy, the continuing movement to consolidation
is anything but inevitable. Defective democracy can turn out to be a permanent state, 15
which in turn impairs the political results. For defective democracies do not generally
produce the benefi ts promised by the democrats and democracy promoters, i.e. greater
prosperity, social justice and security. As the output legitimacy is undermined, defective
democracies are particularly prone to producing populist or nationalist parties, as can be
observed in some Latin American states. From a statistical point of view a low economic
level of development even increases the risk of a relapse into autocracy. This risk applies
particularly to the countries of sub-Saharan Africa.
Decline in infl uence of the old democracies
Given the runaway economic development in some emerging countries and the
growing problem of securing energy supplies, the balance of forces is shifting to the disadvantage
of the old democracies. The OECD’s democratization policy towards states
with large energy reserves (Russia, the Central Asian republics, the “petro-regimes”
in the Middle East) or with considerable potential as an economic power (China) is
made more diffi cult by the loss of “leverage”. 16 Not only the ability to exert infl uence by
political pressure or sanctions against powerful partners, but also the democratic political
will to exert infl uence can weaken because of economic and energy dependence.
Another source of weakness, however, is the loss of moral authority due to policies
that are inconsistent or of dubious international legality. Foreign policy contradictions
arouse suspicions that behind the moral appeal to liberal values lurks a hidden agenda
of spreading geostrategic or free-market infl uence. The U.S.A. and its allies, in particu-
11 In 1974, four-fi fths of all democracies were liberal democracies. In 2003 this applied to less
than two-thirds (Diamond (footnote 1): pp. 16, 18).
12 Wolfgang Merkel/Hans-Jürgen Puhle/Aurel Croissant/Claudia Eicher/Peter Thiery: Defekte
Demokratien, Band 1: Theorie, Opladen: Leske und Budrich, 2005.
13 Steven Levitsky/Lucan A. Way: International Linkage and Democratization, in: Journal of
Democracy 16:3 (2005), pp. 20-34.
14 Marina Ottaway: Democracy Challenged. The Rise of Semi-Authoritarianism, Washington:
Carnegie Endowment for International Peace, 2005.
15 Thomas Carothers: The End of the Transition Paradigm, in: Journal of Democracy 13:1
(2002), pp. 5-21.
16 Levitsky/Way (footnote 13): pp. 20-34.
188

lar, have lost credibility as a result of the controversial Iraq war waged under the banner
of democracy and freedom.
The success of external democratization efforts, however, depends not only on leverage,
but also on linkage, i.e. social, economic and communicative networks and interactions
with the transformation countries. It has proved to be a crucial variable for assessing
the sustainability of the infl uence exerted and its degree of social penetration. 17 In
the context of economic globalization, modern communications technologies and the increasing
importance of non-governmental organizations have meant that the role of linkage
has tended to expand, both within the regions and between the democratic OECD
countries and other parts of the world. This can strengthen the diffusive or infectious
power of democracy and may even partially compensate for loss of leverage.
Backlash against democracy promotion
An increasing resistance on the part of (semi-)authoritarian rulers to external democracy
promotion can be observed worldwide. 18 In over 20 countries the International Centre
for Not-for-Profi t Law (ICNL) has noted a tightening of legislation aimed at restricting
the freedom of action of civil society groups and their international supporters. At the
same time, authoritarian regimes are stepping up their diplomatic offensive against international
democratization efforts. The Shanghai Co-operation Organization, to which
Russia, China and four Central Asian republics belong, has rejected external infl uence on
political reform processes as interference. The Russian political vocabulary now includes
the term “sovereign democracy”, which postulates the primacy of internally controlled
processes of political and economic reform. 19 At the same time, China is strengthening
its position as a donor nation that seeks to translate development and trade relations
into political infl uence. The governments of Russia, Iran, Syria and Venezuela also support
– in competition with the infl uence and development policy of the OECD countries
– those foreign political forces that accord with their geopolitical and ideological interests.
Although there is no sign at the moment of any coherent ideological alternative to
the principle of democracy and political participation as a basis for legitimizing rule by
the state, the consolidation of the cultural hegemony of liberal democracy and universal
human rights is not a foregone conclusion.
Lessons learnt
Finally, there is a largely positive trend. The new emphasis on democracy and human
rights as a foreign policy objective in the 1990s was accompanied by an intensifi cation
of research and evaluation. Observers of German and European democracy promotion
note a “learning curve” and a widening of the fi eld of vision. This is seen in the efforts
for more co-ordination among donors and a deeper analysis of the preconditions and
consequences of external infl uence with regard to power relations.
17 Ibid.
18 Carl Gershman/Michael Allen: The Assault on Democracy Assistance, in: Journal of Democracy
17:2 (2006), pp. 36-51; Thomas Carothers: The Backlash against Democracy Promotion, in:
Foreign Affairs, 85:2 (2006), pp. 55-68.
19 Sabine Fischer: EU-Russia. Democracy Promotion in a Strategic Partnership? in: Annette
Jünemann/Michèle Knodt (eds.): Externe Demokratieförderung der Europäischen Union, Baden-
Baden: Nomos Verlagsgesellschaft, 2007 (in course of publication).
189

The debate about the connection between development and democratization has
moved beyond mechanistic variants of modernization theory and unhistorical hopes of
an unimpeded victory of democracy to yield more differentiated insights. Growth does
not automatically lead to democratisation, nor are there any minimum socio-economic
thresholds that would in principle justify postponing democratization in poor countries.
The empirically demonstrated connection between wealth and democratization 20 relies
for its effect on the mechanism of redistribution. Economic development brings such actors
as a working class and a middle class onto the scene, who unleash democratization
processes and carry them forward. This is accompanied by a weakening of the role of
traditional elites, whose wealth and power are based on extensive landed property and
control of mineral resources. New economic elites (fi nance capital) have less to fear from
democratization and any redistribution of income it might bring, as their wealth is more
mobile and hence less endangered by excessive taxation or even expropriation. 21 The
extent of the redistributive effect of economic development processes, however, depends
also – and this is where politics comes in again – on institutions.
190
II. PROMOTING AND PREACHING – DEMOCRATIZATION AS A GOAL OF
GERMAN FOREIGN POLICY
The German policy of democracy promotion, which was systematically developed
during the 1990s, involves a wide variety of participating actors. A strategy paper at national
level covering the democracy promotion efforts of the various actors in all departments
and for all countries, has yet to be produced, however. 22 Support for elections
and parliaments, international conferences on democracy and human rights diplomacy
as well as political dialogue, sanctions and joint measures within the framework of the
EU’s Common Foreign and Security Policy are the responsibility of the German Foreign
Offi ce. In these areas of activity, which are bound up with foreign policy in the narrower
sense, three basic principles have proven great continuity:
1) Multilateralism: Attempts to go it alone diplomatically tend to be rejected; sanctions
are only ever supported within a multilateral framework (EU, UN), and policies are
geared to internationally agreed norms.
2) A preference for dialogue: In general, Germany prefers a soft conditionality, consultations
and dialogue as well as the exertion of long-term infl uence through involvement.
Coercive measures are only advocated in exceptional cases.
3) A focus on the protection of human rights: In the foreign policy discourse of the German
government, democracy and human rights are often mentioned in the same breath.
20 From a statistical point of view the level of per capita income signifi cantly affects the chances
of survival of existing democracies. There is more dispute about the infl uence of economic growth on
the emergence of democracies, even though recent studies have established a connection. Cf. Carles
Boix/Susan Carol Stokes: Endogenous Democratisation, in: World Politics 55: 4 (2003), pp. 517-549.
21 Carles Boix: Democracy and Redistribution, Cambridge 2003.
22 On the other hand, inter-departmental strategy development in other fi elds has made
progress in recent years. The 2015 Action Plan to attain the millennium development goals, the
German Government’s National Action Plan for Human Rights and the Action Plan for Civil Crisis
Prevention, Confl ict Resolution and Peace Consolidation approved in 2004 contain measures in the
fi elds of democratization, the rule of law and good governance. As regards a strategy for democracy
promotion, however, they are no more than modules.

However, the institutional and strategic measures, which were further expanded under
Germany’s Social Democrat/Green government, are primarily geared to the narrower
area of human rights protection. 23 The same is true of EU policy in this area.
Germany’s Ministry of Economic Cooperation and Development (BMZ) is in overall
charge of long-term democracy promotion within the framework of development cooperation.
The political criteria (last revised in 2006), which are intended to defi ne the
scope and focal areas of development cooperation, give prominent mention to democracy
and the rule of law. The fi ve criteria are the basis for all country-related decisions
of the BMZ, without, however, being linked to a narrow democratic conditionality. The
partner countries for German deveopment cooperation include such outright autocracies
as China, Laos, Nepal, Vietnam, Tunisia and Syria. Some countries with poor or
even negative trends in the fi eld of democracy received aid increases in the period
2000-2006. 24
Development policy programmes and projects are implemented by subordinate agencies.
In the fi eld of democracy promotion these include above all the GTZ, while in the
nongovernmental sector there are the political foundations and a large number of NGOs.
The BMZ’s fi rst strategy paper on democracy promotion was drawn up in close co-operation
with the non-governmental actors in 2005. 25 In addition to the above-mentioned
principles, the following strategic focal areas are chractersitic for Germany’s “political”
development co-operation:
– pluralism with regard to approaches and partners, as refl ected in the party politica
spectrum represented by the political foundations;
– explicit linkage between democracy promotion and the democratization requirements
of the international organizations;
– close linkage beween the goals of poverty alleviation, development and democratization;
– decentralization and participation at local and regional level;
– prominent regard for output legitimacy, especially in government development cooperation
(administrative reforms, institution building, good governance, etc.); a
strategy for co-operating with countries that have poor governance and fragile state
institutions is currently being developed.
The BMZ strategy paper on democracy promotion explicitly recognizes the political
power dimension of democratization processes and the importance of just redistribution
and social cohesion. In describing the options, however, the position paper confi nes itself
to positive development policy measures, which are in the purview of the BMZ. Trade
and economic policy measures are only vaguely outlined.
The coalition agreement between CDU/CSU and SPD signed in November 2005
promises to give equal weight to values and interests in the future: “Our foreign and
development policy will not be silent in the face of threats to democracy, freedom, the
rule of law or minority rights. We will pursue a credible foreign and development policy
23 This includes the German government’s annual human rights reports, its Commissioner for
Human Rights Policy and Humanitarian Aid in the Foreign Offi ce, the German Institute for Human
Rights, and the Action Plan for Human Rights.
24 Richard Youngs (ed.): Survey of European Democracy Promotion Policies 2002-2006, Madrid:
FRIDE, 2006, p. 130.
25 BMZ: Förderung von Demokratie in der deutschen Entwicklungspolitik, BMZ Spezial, Bonn:
BMZ. [2005]
191

which will openly address shortcomings and promote the best interests of our country.”
In the past these aspirations have not always been matched. 26 In such a morally charged
fi eld of policy as democracy promotion, however, it is not a question of whether practical
measures fall short of the goals set by their authors, but of the degree to which rhetoric
and practice diverge. German development co-operation with its highly ramifi ed network
of non-governmental and quasi-non-governmental actors reveals marked strengths. The
long-term and value-related work of the foundations is rated as particularly effective and
suited to the problems addressed. The BMZ’s funds for the promotion of democracy, civil
society and public administration total around 360 million euros or about 9% of the entire
BMZ budget. 27 In half of the partner countries this area is a priority area for development
cooperation. If account is also taken of the fact that democracy and participation have
been incorporated into other parallel programmes and projects as cross-cutting issues, it
is possible to speak of a real prioritization in German DPC.
In international diplomacy, Germany has - in line with its own principles - seldom
remained passive when democratic processes went into reverse,. At the UN bodies Germany
has always voted for the pro-democratic side. With regard to authoritarian regimes
Germany has often openly supported the opposition forces and shared responsibility for
sanctions within the framework of multilateral bodies (EU, UN). 28 Germany is the fi fth
largest donor to the UN Democracy Fund set up in 2005 to support young democracies
and has been a member of the International Institute for Democracy and Electoral Assistance
(IDEA) since 2002.
As for specifi c country-related measures, Germany as a “civil power” implements
democratization policy with due caution, albeit often with an eye to its own interests, primarily
commercial ones. For many years the political pressure on Russia and China was
applied in small doses or remained ambivalent. Economic sanctions are applied selectively
– usually, it must be said, after diffi cult decision-making processes within the EU
– and they mainly affect economically insignifi cant states in Africa. Most studies point
out that this can only be partly explained in terms of the varying effectiveness of sanctions.
In the Middle East, Germany has long played a restrained role in the promotion of
democracy. The Iraq war, however, has opened up new perspectives and initiatives. On
the one hand, the subject of reforms is now on the agenda in nearly all countries of the
region. On the other, Germany is perceived as a more credible actor in the societies there
because of its rejection of the Iraq war. The EU as a whole has a more positive image
than the U.S.A., which is attributable to its involvement in the Mediterranean region in
a spirit of partnership and its more differentiated attitude to the Israel-Palestine confl ict.
The German and European policy of democracy promotion, which is characterized by
indirect measures (civil society, human rights, economic reforms) and an avoidance of
confrontation, relies on the trust it has built up as a “partner”, without, however, exploiting
the potential to the full.
26 In a comparative analysis of the democracy promotion policies of 40 states in the years 1992-
2002 Germany received an overall score of “good”. Only Canada, The Netherlands and Sweden
were classifi ed as “very good”. Hermann/Piccone (footnote 5): p. 16. For a more ambivalent balance
sheet cf. Richard Youngs (footnote 25), pp. 109-132.
27 Claudia Zilla: Externe Demokratieförderung in Bolivien. Die Politik Deutschlands und der
Europäischen Union, SWP-Studie 28, Berlin: SWP, 2006, p. 15.
28 Herman/Piccone (footnote 5), pp. 83-87.
192

III. SCENARIOS
Scenarios for a policy with global reach, in which everything really is “connected with
everything else” and every specialist article begins with the statement that generalizations
are worthless, have a mainly heuristic function. If we focus on possible development
paths and set aside the numerous alternatives, the following scenarios may at least
be instructive and provide food for thought.
All the scenarios proceed from certain shared assumptions. The democracies consolidated
in 2006 succeed in maintaining their democratic systems even under adverse conditions
(e.g. economic crises, populist and nationalist movements). The democratization
processes in the transformation countries of Central and Eastern Europe, which lie in the
catchment area of the EU, are generally making progress. In the defective democracies
of Latin America there is no lasting relapse into authoritarian systems of government despite
crises of confi dence, populist temptations and the limited capacities of the elected
governments. Nevertheless, globally a signifi cant proportion of states remain far from
the status of a consolidated democracy by the year 2020. 29 In the oil-rich states of the
Arab world rapid progress towards democratization looks unlikely in the medium term
because of the concentration of power and the likelihood that the elites will continue to
be able to safeguard their economic position.
The unfolding of the three scenarios depends initially on one parameter at the level
of international relations, which determines the scope for governmental and non-governmental
democracy promotion: the infl uence of “liberal democracy” as a global norm
(scenarios I and II) or the growing resistance to it, which can lead to a new polarization
(scenario III). To this must be added factors favouring democratic practices in the
transformation countries, such as a) at regional level: the settlement of confl icts and the
progress towards democracy made by regional hegemonic powers; and b) at the domestic
and transnational levels: development processes favouring redistribution that produce
and strengthen the standard bearers of political reforms.
III.1 The “power of democracy”: the chances of a “fourth wave”
At the international level, astute diplomatic initiatives and close co-operation between
democratic countries succeed in strengthening the claims of liberal democracy and human
rights to be international norms and in containing the backlash. The “community
of democracies” develops binding standards for democracy promotion and reinforces
the co-ordination of bilateral measures. A new occupant in the White House makes the
U.S. revert to a more multilateral course and support the relevant initiatives at the UN.
Democratic elections and effective participation continue to gain ground as sources of
domestic legitimacy and a precondition for international co-operation.
In return the democratic industrialized countries offer the developing countries a
greater say in the WTO and the international fi nancial institutions, support for the democratic
political programmes of regional organizations (e.g. MERCOSUR, AU), and the
29 According to the 2006 Bertelsmann Transformation Index, 29 of the 119 countries investigated
do not have the necessary prerequisites to develop into democratic market economies in the
medium term. Twenty-fi ve states also lack the prerequisites for developing into democratic market
economies in the long term. Bertelsmann Foundation (ed.): 2006 Bertelsmann Transformation Index,
Gütersloh: Verlag Bertelsmann Stiftung, 2005, p. 28.
193

setting up of international stability funds to be administered by the UN with a view
to improving the output performance of young democracies. The efforts to attain the
Millennium Development Goals and a just distribution of the globalization gains are
stepped up at all levels.
Under the following favourable conditions the “normative power” of democracy again
triggers a positive trend with signifi cant progress towards democratization by 2020.
A number of poor countries succeed in in launching inclusive economic development
processes with high redistribution effects. The PRSP processes generate their own dynamic,
while the claims to and chances of participation are noticeably enhanced.
In Russia and China a new economic class emerges that breaks free of the old leadership
cliques of the ruling parties and adopts a positive stance to reforms. In Russia the
trend away from democracy is curbed, while in China a political liberalization process
gets under way. In Iran more moderate forces come to power after the social and economic
failures of the Ahmadinejad government.
In some Arab countries (such as Morocco or Yemen) successful economic and social
policies plus an opening up of political competition strengthen moderate Islamic forces,
which participate as partners in democratic reform processes, thus setting an example to
other states in the region.
Trouble spots such as Congo, Sudan, Somalia and Israel/Palestine are defused
through international mediation. New confl icts are contained at an early stage through
international intervention. In Iraq and Afghanistan stabilization and reconciliation make
progress, while international support is maintained.
Even under these favourable conditions only a minority of the numerous defective
democracies are able to overcome their shortcomings. Nevertheless, the international
environment and the successes in the war on poverty facilitate a gradual improvement in
democratic quality. Political opening and redistributive development reinforce each other
and give rise to a virtuous cycle in the developing countries. In this environment, policies
of a populist nature and dubious democratic quality, but aiming at more social equality,
e.g. in some Latin American countries, also lead to a stronger demand for democracy in
the medium term.
In the (semi-)authoritarian states the political pressure for reform steadily increases
both within and without. The opening and diversifi cation of the economy – whether desired
or enforced by the drying up of sources of rent income – permit alternative power
centres to arise. Political windows of opportunity (e.g. the death of rulers or the stepping
down of the old leadership cliques; economic or humanitarian crises) can bring reformminded
forces to power which with international support can master the transitional
crises and take the path to (defective) democracy. However, the rulers of states who oppose
political and economic reform can pull up the drawbridge for as long as their magic
potion (oil, natural gas, nuclear weapons) lasts.
194
III.2 The “impotence of democracy”: de-coupling
Human rights and liberal democracy are still normative points of reference in international
relations. But since few if any of the above-mentioned favourable factors take
effect at regional or domestic level, the actual democratization processes in many states
remain blocked. An externally induced “fourth wave” can only operate on the surface.
Authoritarian regimes evolve at best into semi-authoritarian regimes. In this scenario the

number of “electoral democracies” continues to increase. The phenomenon of a “decoupling”
of public discourse from the political actions of the decision-makers sets in, as is
already observable in many hybrid regimes. 30 The norms of democracy are recognized as
a part of “world culture”, but are not fully implemented as they clash with national or local
norms and expectations. Wars and ethnic confl icts, violent struggles with opposition
movements or – from a left-wing populist direction – entrenched property interests also
justify the (transitional) restriction of democratic rights. Democracy in many countries is
still just a game at which only a few really play.
This leads to a detachment also on the part of the “democracy promoters”. As the
investments in political reform processes seem not to pay off, they become ever more
mindful of their own economic and security interests. Active democracy promotion
is concentrated on less problematic regions or delegated to non-governmental actors.
Some OECD countries fall back on the doctrine of “change through trade”, which justifi
es abandoning political interference as long as stability and a minimum rule of law are
guaranteed for investors and economic actors.
In the long term the contradiction between discourse and practice brings about an
unstable situation, which may open up possibilities of democratic revolutions but also
makes the world more vulnerable to domestic and international crises. The danger of
this superfi cial liberalization getting out of control does not escape the notice of the authoritarian
leaderships. Their resistance to the liberal democratic discourse takes us to
the third scenario.
III.3 “History goes on”: the new polarization
Democracy as a norm of behaviour is increasingly called into question by authoritarian
states and hybrid regimes. Governments of countries like Venezuela, Russia, China
and Iran formulate arguments against the hegemonic notion of a universal right to “liberal
democracy” and the practice of external democracy promotion. They organize themselves
into international bodies across regional and cultural boundaries (UN General
Assembly, Human Rights Council, UN conferences) and into regional alliances like the
Shanghai Co-operation Organization or the Arab League so as to defend their own development
paths under the banner of sovereignty. The concept of democracy is not rejected
but reinterpreted. Concepts such as “development democracy” or “Islamic democracy”
are propagated as “sovereign” models adapted to the needs of non-Western developing
countries; they are characterized by a stronger concentration of political power, state
control of vital economic resources in the service of the common good, and – in the
case of Islamic democracy – religious restrictions on civil liberties. The alliances have no
common ideological basis, but are purely ad hoc coalitions aimed at repelling external
interventions in the members’ domestic affairs, legitimizing the rejection of civil society
transactions and thus to ensure they retain power in their own countries and spheres of
infl uence (“co-ordinated backlash”). Both governmental and non-governmental efforts at
liberal democracy promotion are only permitted within strictly defi ned limits, while UN
initiatives that seek to go further are blocked. In view of the global power shift the au-
30 Andrea Liese has plausibly introduced the concept of “de-coupling” into organizational sociology
in order to explain continuing human rights violations in a context of global recognition of
human rights norms. Cf. Andrea Liese: Staaten am Pranger. Zur Wirkung internationaler Regime
auf innerstaatliche Menschenrechtspolitik, Wiesbaden: VS Verlag, 2006.
195

thoritarian clusters can commit considerable resources to fi nding and keeping economic
and military allies. To some defective democracies – in Africa for example – offers of
economic support and trade preferences are attractive, as they are made with no strings
attached and make it easier for the rulers to stay in power. In states that are ethnically
divided and torn by civil wars the model of a “development democracy” with strong leaders
can temporarily meet with a positive echo even among the mass of the people. In defective
democracies, in which the benefi ts of participation are not obvious to the poorer
strata of the population, the combination of democratic nomenklatura and nationalism,
populist or religious ideologies, falls on fertile ground.
In this context of polarization the IMF, the World Bank and the UN lose some of their
signifi cance. Co-operative confl ict resolution becomes more diffi cult. The economic and
military power set-up becomes a crucial variable in the further development of democratic
structures worldwide. The U.S.A. and Europe draw closer together and consolidate
their commitment to democracy and a market economy primarily in their “zones of
infl uence” (Latin America, Eastern Europe, to some extent North Africa). Instead of the
“proxy wars” in the period of the East-West confl ict, quite a few countries could experience
a proxy struggle for legitimacy, popularity and victory at the ballot box.
The mutual economic dependence of liberal and “sovereign” democracies means that
there is no danger of a new “Cold War”. In this scenario, however, the promotion of liberal
democracy faces a severe test. However, its opponents also have little room for manoeuvre.
Apart from the heterogeneous nature of their camp the question of the long-term
legitimation of power is the Achilles’ heel of the “sovereign democracies”. The governing
elites have to legitimize themselves mainly in terms of economic and social output. For
“developing democracies” like China or Vietnam the balancing act between an open market
economy and political control is costly in the long run. If the authoritarian regimes in
the Arab countries miss the right moment for political and economic reforms, they run
a long-term risk of crises of legitimacy and abrupt or even violent overthrow under the
pressure of an increasingly dissatisfi ed population and radical Islamic movements.
196
IV. OPTIONS: “MORE OF THE SAME” AND NEW WAYS FORWARD
Democracies are demonstrably more peaceful in their dealings with one another.
Democratic regimes tend towards an open trade policy, which has particular advantages
for export nations such as Germany. Democracies are also more likely to settle domestic
confl icts peaceably. Germany’s long-term interest in a democratically ruled world, the
existing international obligations and the growing network of actors calling for compliance
with these obligations indicate that democratization remains an important objective
of German foreign policy. However, the conditions for success are becoming more
diffi cult, while opposing interests are growing more powerful. Democracy promotion
should therefore be more strongly anchored in the institutional structure of German and
European foreign policy. As a fi rst step the structures and institutions created for the
narrower fi eld of human rights work could be expanded and their remit expressly extended
to democracy promotion. The drawing up of an interdepartmental action plan for
the German government would help to mobilize the country’s whole foreign relations
potential. In addtition, the following options can be derived from the above-mentioned
challenges and scenarios.

IV.1 Strengthen international norms
At the beginning of the 21st century the use of external infl uence to impose democratic
principles is being called into question by powerful actors. Because of its multilateral traditions
the Federal Republic of Germany is predestined to intensify international dialogue in
close co-operation with the other EU member countries and the members of the Community
of Democracy and to form the broadest possible alliances dedicated to the promotion
of democracy. The diplomatic initiatives should be aimed at securing the acceptance of
liberal values and the credibility of international democracy promotion and, in the medium
term, at institutionalizing it to a greater degree at the UN. To achieve this, ideological
ballast must be jettisoned, a clear distinction made between military regime change and
democracy promotion, and democratic norms separated from narrowly defi ned economic
models. Binding rules on the means permitted for external democracy promotion (right of
intervention) can prevent new polarizations from arising and strengthen the coherence of
external infl uences. At the same time, demands for more participatory decision-making
structures in international organizations should continue to be supported.
IV.2 Promote redistribution 31
A balanced distribution of economic, intellectual and organizational resources in a
society enhances the chances of democratization. The following development and economic
policy measures, which – in harmony with the Millennium Development Goals
– are geared to the participation and economic security of broad social strata, should
therefore be expanded;
– measures for redistributing wealth and increasing access to land, e.g. by means of
land reforms, leaseholder protection and the formal legal recognition of the informal
titles to property of the poor;
– massive investment in the education and health of the poor (as outlined in the Millennium
Development Goals) so as to raise their productivity as well as support for
micro-credit programmes giving the poor access to their own sources of income;
– support for the creation of small and medium-sized enterprises outside of state patronage
networks;
– opening of markets in areas where poor countries are able to compete with commodities
produced by as wide a range of producers as possible (primarily agricultural);
– initiatives for political control of the income derived mainly from rents (proceeds from
the export of raw materials, loans, aid, etc.): 32 The most radical option would be a proviso
that economic partners in the rich democracies would no longer pay such moneys
to elites and undemocratic governments but into funds that fi nance modernization (e.g.
land reform, education, health). Less sweeping would be the strengthening of international
regimes that pledge the governments of rentier economies to transparency
and participation in the administration of revenues. Both steps are only conceivable
if it proves possible to forge a broad coalition which, in the case of rentier economies
exporting raw materials, would also include such major importers as India and China;
31 The argumentation in this section draws very heavily on Michael Dauderstädt/ Marika
Lerch: Internationale Demokratieförderung. Mit begrenzter Macht zur Machtbegrenzung. Reihe
Frieden und Sicherheit, Bonn: Friedrich-Ebert-Stiftung, March 2004
32 This is dealt with in detail in: Dauderstädt/Schildberg (footnote 13).
197

– maintenance of state control. The classic paradigm of liberal reforms that reduce the
authority of the state has often tended to have unfavourable redistribution effects
and thus harmed the prospects of a sustainable democratization. In relation to young
democracies the delicate balance between state and market – apart from basic principles
of a social-market economy – must not be imposed, as this makes the gain in
participatory democracy a reductio ad absurdum. The requirements of the international
fi nancial institutions must be critically examined from this point of view.
198
IV.3 Sharpen political instruments
The political instruments used in German foreign and development policy to support
democratic forces, parties and governments in transformation countries are already fully
developed. In order to maintain their effectiveness under increasingly diffi cult conditions
and to develop suitable political approaches to authoritarian states the following
options need to be examined:
– As the backlash against democracy promotion is blocking the important channel
of exerting infl uence via transnational networking processes and the promotion of
NGOs, the right to freedom of association deserves particular and speedy attention
in the political dialogue and the conditionalization of development aid. The special
aspect of trade union rights should also remain high on the agenda of German human
rights policy so as to facilitate the development of alternative social forces at the
interface between the economic and political sphere and to ensure the redistribution
effects of economic growth.
– Organizations that enjoy massive social support but do not pursue clearly liberal
democratic goals can either hinder reform processes or – if they accept them – contribute
crucially to their relevance and legitimacy. They are therefore – despite the
obvious risks – to be upgraded as addressees of external democracy promotion. For
the Middle East in particular the isolation of Western democracy activists and the
weakness of secular civil society groups leave no alternative to involving moderate
Islamic forces in political reform efforts.
– The existing formulas for making the political processes of development co-operation
more participatory – such as within the framework of the PRSP and the Cotonou
Agreement – should be systematically put into practice. Parallel to this the German
government might propose the introduction of Human Rights and Democratic Transition/Consolidation
Strategy Papers in the EU. 33 They would promote the process of
national reconciliation and hence ownership in the countries concerned while at the
same time bringing more coherence into European policy.
– Under certain conditions the underpinning of concrete political demands by the
threat of sanctions of an economic nature is both called for and effective. But in view
of global power shifts the tendency is towards a decline both in the leverage individual
states can obtain through sanctions and in the vulnerability of numerous authoritarian
states. In the short term, therefore, there is a need for a more closely coordinated
sanctions and conditionality policy within the EU and OECD. Medium-term
33 Richard Youngs et al.: No lasting peace and prosperity without democracy and human
rights. Harnessing debates on the EU’s future fi nancial instruments, EP Policy Department Study,
EP/ExPol/B/2004/09/10, Brussels: European Parliament, 2005, p. 25.

options include internationalizing rules and decision-making processes for imposing
UN sanctions for breaches of democratic norms (see 4.1).
– Democracy promotion turns out to be particularly effective and sustainable when there
is a high level of linkage. The “power of democracy” is then exerted through transnational
channels. The promotion of integrative processes, interregional relations and
co-operation structures – especially through the EU – is thus an important element of
long-term democracy promotion, particularly when social and cultural exchanges are
facilitated.
– The relevance of linkage also underlines the importance of infl uential democracies
in other regions of the world. Countries like South Africa, Brazil, Mexico, Indonesia,
India and Turkey are possible “anchor countries of democracy promotion”, which
for their part can develop the necessary networks and exert infl uence in their neighbourhoods.
Russia and China are major addressees of German democracy and human
rights policy because they are of crucial importance for the democratization
prospects and integration processes in Central and East Asia. Energy, security and
migration concerns suggest the need for a strong commitment to political reforms in
the Middle East and North Africa. The obvious choice of regional focus would be the
countries of the EU-Mediterranean partnership, where linkage and political institutions
are already well advanced.
– Democracy promotion is an act of interference in the balance of political and social
forces which can trigger destabilization processes and internal confl icts. The strategies
must therefore be defi ned on the basis of a profound knowledge of the country
concerned and constantly reviewed and adapted to avoid possible unintended consequences.
In order to assess the political consequences of the various possibilities
of intervention, expertise on democratic transition processes within the respective
countries should be nurtured or built up. Such an infrastructure is not least a prerequisite
for adopting and taking account of recommendations made by the democratic
movements in the countries.
– There is a general consensus among people in Germany and Europe that democracy
and human rights are paramount values. However, an honest debate on the future
of democracy promotion in German foreign policy should not omit to mention that
sacrifi ces and adjustments are also required in the old OECD countries. Economic
development and modernization, which are considered to be important factors in the
consolidation of democratic systems, entail increasing competition for raw materials
and world market share. If the desire for democratic development is sincere, Germany
will have to make a long-term switch to a sustainable economic policy that can
manage with fewer raw materials and a smaller foreign trade surplus.
About the author: Marika Lerch is an administrator at the Directorate-General for External Policies of the
General Secretariat of the European Parliament. The views expressed in this essay are the author’s own and
not those of the institution she works for.
199

200
GERMAN FOREIGN POLICY AND THE GRAND
COALITION
Stefan Mair 1
This article authored by Stefan Mair was originally published by Friedrich-Ebert-
Stiftung, London Offi ce, London, 2006
The foreign policy of Germany under the Grand coalition is marked by the continuity of
major policy trends that had already evolved under the red green coalition. Yet, the country
needs a profound discussion about the future of its foreign policy if it wants to face up to the
challenges of the future.
Assuming the German chancellorship in November 2005, Angela Merkel had an excellent
start in foreign policy. Inexperienced as she was, expectations were low as to what
she could achieve in this area. But within weeks of her chancellorship she mended fences
with the United States and President Bush in particular and restored trust among her European
partners in Ger many’s European policy. Commentators were seeing Germany’s
foreign policy heading back to the future: a future in which Germany again plays the
double role of bridge builder between the two sides of the Atlantic on the one hand and
engine for European integration on the other.
However, these expectations seem to be based rather on Merkel’s style of leadership
than substantial changes in Germany’s for eign policy. Merkel’s ability to moderate and
facilitate as well as her cautious approach contrast very much with Schröder’s prefer ence
for personal relations, publicity and posturing as the alpha male. The positive perception
of Merkel’s attitude towards for eign policy making certainly got reinforced by the personality
of the new foreign minis ter Frank-Walter Steinmeier. He prefers to keep a low profi le
but is certainly one of the most effi cient managers of political power Germany has.
Though style certainly matters in foreign policy, it should not be mistaken for substance.
Here, a continuity of several trends which have started to change German for eign
policy as far back as the early 90’s and got accelerated during the red-green coali tion can
be discerned.
Loosening the ties with the U.S.
So, what are these trends? The following paragraphs will focus on three of them. The
fi rst trend is a further loosening of the close partnership with the United States. The image
of the United States in the German public has massively changed. During the Cold
War, the dominant perception of the United States was the one of an indispen sable force
in Europe, which ultimately guaranteed Germany’s security. According to opinion polls,
currently the German pub lic perceives the United States more and more as an international
trouble-maker who pursues its interest without taking the inter ests and needs of
its partners into consid eration. This perception was certainly rein forced by the Iraq war
1 Stefan Mair is Associate Director at the Stiftung Wissenschaft und Politik (SWP)/German
Institute for International and Security Affairs in Berlin, the German government think tank on
foreign and security policy.

ut – due to resent ment concerning the United States’ posi tions regarding the Kyoto
Protocol and the International Criminal Court – it had already evolved beforehand. Even
if the foreign policy community does not fully share this perception, it does not leave it
unaffected. Within this community, the dominant position is certainly that an ef fective
management of the global order still requires a close partnership between Europe and
the United States – however, not at any cost. And while a change in government in the
United States in 2008 will almost certainly result in a change of style in foreign policy, it
is dubitable whether it will lead to a change in sub stance in this case.
The EU: A new pragmatism
The second trend in Germany’s foreign pol icy that should be highlighted is the
increas ing pragmatism in its European policy. Since the Treaty of Rome and up to the end
of Kohl’s chancellorship, Germany’s Euro pean policy was marked by reconciliation and
-later on -friendship with France, the pursuit of ambitious visions and the willing ness to
carry substantial fi nancial burdens to achieve these visions. This has changed in the late
90s. Schröder’s European policy was more an expression of this change than its cause.
There are three underlying reasons for the increasing pragmatism. The fi rst one is a matter
of generational differ ences. For the eight years of Schröder’s chancellorship, Germany
was governed by representatives of the post-war generation, which does not directly
link European inte gration and peace and security on the con tinent in the same way as
their predeces sors did. Secondly, the prolonged economic crisis in Germany combined
with the rigidi ties of the European Stability Pact has in creased sensitivity regarding Germany’s
perceived role as a European paymaster. And fi nally, the German public widely
shows the same assessment as the people in other European countries that “Brussels”
has degenerated into an overregulated, in-transparent and insuffi ciently democratic bureaucracy.
General mood is certainly in favour of ‘less’ rather than ‘more’ Europe – with
one exception: CFSP is the fi eld in which ‘more’ Europe is wanted.
A more active international role
This leads on to the third signifi cant trend is discernable in Germany’s foreign policy:
the increasing willingness to take on interna tional responsibility; not only by providing
development aid and engaging in multilat eral organisations, but also by deploying
troops to remote regions. The main reason for this trend has been the rising awareness
among foreign policy makers that in a glob alised world welfare and security of Ger many
can be immediately affected by de velopments in remote regions. September 11 and the
emergence of international ter rorism certainly promoted this awareness. Foreign and
security policy makers realised that dealing with new risks cannot be left to development
and economic cooperation, but requires the application of the full range of foreign and
security policy instruments, including military means. It also became clear that a more
proactive and visible stance in international affairs is needed. The claim to have a say
in the shaping of the global order can only be upheld if one is also willing to contribute
to the costs of it. And Germany increasingly does so, as its deployment of troops in Afghanistan,
in the Democratic Republic of Congo and at the coast of Lebanon shows.
The combination of these three trends – the loosening of close relations to the United
States, pragmatism in European policy, and more international responsibility – has one
unavoidable effect: the diminishing of cer tainties in Germany’s foreign policy and the
201

growing necessity of a thorough debate on its principal directions. This means that the
times in which the German government could afford a more or less bureaucratic management
of its external relations are gone. More political leadership and a more strategic
orientation are needed.
And this leads on to the upcoming tasks for the current and probably for the next
gov ernment. The fi rst one is to involve the Ger man public more in foreign policy issues in
order to overcome the manifestly unenthu siastic attitude of the German public to wards
foreign policy. On the one hand, it supports a greater international role of Europe and
Germany, but on the other hand it shies away from the costs of such a role, especially if
it means military engage ment. This mismatch must be addressed by the political leadership.
The need to take on international responsibility and for interna tional burden sharing
must be explained more convincingly and more emphatically. Secondly, Germany must
revise its system of foreign policy making. It is marked by po litical incoherencies, competition
or non cooperation between government depart ments and slow decision making
processes rather than by effectiveness and effi ciency. If the grand coalition achieved both
– more public support for bearing the costs of for eign policy and a more effective foreign
pol icy management -it would really change German foreign policy for the better.
202

GERMANY IN INTERNATIONAL RELATIONS –
AIMS, INSTRUMENTS, PROSPECTS
Jochen Steinhilber
This article authored by Jochen Steinhilber was originally published by Friedrich-
Ebert-Stiftung, Department for Development Policy, Berlin, 2008
The Compass 2020 project represents the Friedrich-Ebert-Stiftung’s contribution to a
debate on Germany’s aims, role and strategies in international relations. Compass 2020
will organise events and issue publications in the course of 2007, the year in which German
foreign policy will be very much in the limelight due to the country’s presidency of the EU
Council and the G 8. Some 30 articles written for this project will provide an overview of
the topics and regions that are most important for German foreign relations. All the articles
will be structured in the same way. Firstly, they will provide information about the most
signifi cant developments, the toughest challenges and the key players in the respective political
fi elds and regions. The second section will analyse the role played hitherto by German
/ European foreign policy, the strategies it pursues and the way in which it is perceived.
In the next section, plausible alternative scenarios will be mapped out illustrating the potential
development of a political fi eld or region over the next 15 years. The closing section
will formulate possible points of departure for German and European policy.
ABSTRACT
Both the ambitions and the challenges of German foreign policy have increased. As
foreign and domestic policy problems become increasingly intertwined, and the question
arises of what politics is still capable of, not to mention the crisis-ridden development of
European integration, high-profi le – and in part more risky – external commitments, and
growing budget constraints, foreign policy will inevitably fi nd itself increasingly forced to
publicly justify its actions. This calls for a critical assessment of the foundations of Germany’s
foreign relations. Modern, practical foreign policy is bound to remain contradictory, to
some degree. Instead of airy theorizing, then, what appears to be needed is greater transparency
in the different foreign policy fi elds, guiding political decision-making by identifying
a corridor of strategies and options. Confl icts regarding practical goals, the need to take
ad hoc decisions, limited resources, and integration within international institutions are
among the important factors infl uencing policy formulation, bringing pressure to bear on
both the values on which foreign policy rests and abstractly formulated material interests.
While foreign-policy decisions have so far often pre-empted public opinion, in future
the public will have to be viewed as a partner in the making of foreign policy, and political
analysis, political debate, and political action will have to overlap more closely. The
aim of the Friedrich-Ebert-Stiftung’s “Compass 2020” project is to stimulate discussion
on foreign-policy strategies and to develop scenarios that may serve to outline a plausible
picture of German foreign policy and its determinants over the coming 15 years. The
203

lines dividing conservative, liberal, and social-democratic foreign policy will thereby be
defi ned principally by the issues of social justice and global participation, the role of the
state, and efforts to put international relations on a fi rm legal footing (“juridifi cation”).
The list of challenges that can no longer be addressed without reference to global
contexts is ever increasing. In our view, there are eight themes that will defi ne discourse
on international politics in the medium term. These include the global economy, demographic
and migratory developments, technological advances, the rediscovery of environmental
and climate policy, resource management and protection, human development,
confl ict and security, and issues bound up with government and governance. None of
these themes can be viewed in isolation; effective handling of the challenges they represent
requires recognition of their manifold interrelations. Social disparities will grow not
only between countries and regions, but also within individual societies, thereby establishing
an underclass of states. As the “fl at world” (Thomas Friedman) extends to Shanghai,
Johannesburg, São Paolo, and Bangalore, the “planet of slums” (Mike Davis) will
continue to grow. Trade relations will be governed by numerous overlapping bilateral and
regional agreements that also lay down social and environmental standards. In the most
favorable case this will lead to an attempt to establish a new global regime, although in all
probability it will result in further disintegration of the regions that have been left behind
and even better integration of the industrialized nations and large emerging countries,
which are closely interlinked already. Major socioeconomic disparities, but also armed
confl icts, environmental disasters, and lack of resources, will serve to intensify migration
both in the countries of the South and between the world’s rich and poor regions.
The energy question is closely linked to the global economy. Economic development is
inconceivable without a secure, frictionless, and affordable energy supply, and access to
energy is a basic component of global equity. Though energy policy largely vanished from
the political agenda after the two oil shocks of the 1970s, growing demand for energy in
the emerging countries and political attempts to instrumentalize energy resources are
now fuelling a debate on energy security. Climate and the environment, in turn, must
be seen as long-term, complex problems that extend not only into the energy sector, but
deep into other fi elds – including technology and security policy, as well as economic, social,
and cultural policy. The large number of state, non-state, and private actors involved
will in future make environmental and climate policy a testing ground for the development
of effi cient and equitable forms of global governance. In the coming years the most
pressing environmental problems will be virtually insurmountable without a massive use
of technology, and access to technology – for example, to broadband networks – will be
crucial to economic and social development. But the results of further technologization
will be ambivalent: society will have to exercise preventive control over sensitive areas
of technology and to defi ne political limits concerning what is technologically possible.
The proliferation of risky technologies, but also technological innovation as a possible
means of lowering the threshold for military intervention, will generate problems with
implications for security policy today. How we deal with terrorism, disarmament, and the
problems of failing/failed states will range high on the agenda. None of these challenges
can be effectively addressed by purely military means; indeed, the military component
plays no more than a tiny role in any one of them. The most promising approaches in the
medium term are likely to be diplomacy, cooperation, and global regimes in the case of
disarmament; police and intelligence services, information and educational work, and
social policy as far as terrorism is concerned; and preventive confl ict management and
204

sustainable state-building when it comes to regional confl icts. But one of the key factors
determining success or failure in these core areas of the global agenda will be our ability
to adapt the modern nation-state to the new conditions, to further develop and consolidate
democratic statehood in developing countries, and to create a set of stable and effi
cient regional and global structures.
Of course it could all turn out quite differently. What kind of world will we be living in
in 2020 if – roughly speaking – “capital”, “crisis”, “cooperation”, and “culture” turn out to
be the key factors determining the world’s fortunes? Will it be a “Microsoft World” (Scenario
1) that revives the market principle and cements the economic and political dominance
of the old Western blocs – the US and the EU – and their traditional hierarchies, but
that discounts the signifi cance of global governance and disregards social issues pertaining
to global equity? Or will we fi nd ourselves surrounded by “Firewalls” (Scenario 2)? That
would indicate a missed opportunity to craft an inclusive, more democratic, and social
globalization, and in a polarized world the idea of the global village would collapse like a
house of cards. We would then fi nd a more security policy-oriented European Union standing
on the frontline of numerous confl icts, in a world defi ned by barriers and boundaries
and high-fl own illusions about the system’s “airtightness” – that is, in a world once more
divided into spheres of infl uence, and so more suspicious and less cooperative. In the 2020
“Firewall” world the watchword would be “Government without Governance”. The “Linux
Option” (Scenario 3) too is no ideal world, but it is at least more socially networked, more
democratic, and politically more innovative than it was at the beginning of the twenty-fi rst
century. NGOs are no replacement for democratic development of informed opinion, the
political hype generated in the course of campaigns tends to fl ag when it comes to concrete
efforts at implementation, and national governments continue to be the real centers of
power, but in the Linux world political processes have become more decentralized and
transparent. Those populating the Linux world are fully aware that the world is networked,
and they have a sense of interdependence; many of them develop several loyalties – toward
their neighborhoods no less than toward transnational communities. That is a good basis
for a far-reaching transformation of global governance.
Certainly, there is no predicting the future, but we can help to shape it. Looking at
our three scenarios, the crucial task facing international relations in the years to come
will be the creation and strengthening of political trust and prevention of the erosion of
trust. One way of achieving this will be through integration rather than exclusion – without
further EU integration Germany will be unable to attain most of its foreign-policy goals.
“Europe must work!” and in a twofold sense: on the basis of democratic and effective
structures and via European political initiatives geared principally to social problems.
But building trust also means building bridges without creating new divides, developing the
common good instead of serving special interests, be they religious, ethnic, or economic in
nature, developing social democracy, engaging more in preventive, civil action than in
reactive strategies, and, fi nally, through political debate rather than political stonewalling.
A more urgent need for public justifi cation of foreign-policy decisions should therefore
be seen less as a reason for nervousness than as an opportunity to utilize an improved
networking of political analysis, political debate, and political action to arrive at new answers
and to secure more sustainable support for foreign policy in society.
“In the long run”, John Maynard Keynes noted in view of the confusing diversity of economic
forecasts, “we are all dead”. Before that, though, it might well be worth lending a hand
to shape world events to accelerate the construction of a just and peaceful world order.
205

206
I. COMPASS 2020
Virtually no one would dispute that the outside world is getting closer to us, the
framework conditions for German policy have changed substantially, and it has generally
grown more diffi cult to till the political fi eld. Between crisis management and the day-today
business of politics, discussion of Germany’s goals, instruments, and perspectives in
international affairs often gets less than its fair share of attention. So far, however, there
has been little demand for a debate of this kind either from politics or from the public at
large. What we have seen instead is a “permissive consensus” between government and
governed, that is, a situation in which foreign-policy decisions are accorded a measure of
tacit support, as has long been the case in relation to European integration, too.
More recently, however, there have been unmistakable signs that the present stance of
“amicable disinterest” is coming under increasing pressure and that the need to initiate a
strategic debate on Germany’s role in international relations is gaining ground among German
political actors. While it is true that the foreign-policy decisions taken by German governments
in recent years have for the most part been unambiguous, their foundations have
sometimes been uncertain. In a time of radical change in international affairs, in which
Germany’s instruments and strategies need to be adapted to new realities this impression
will only intensify. A number of weighty foreign-policy decisions, including notably those
on German Bundeswehr missions abroad, have been taken on an ad hoc basis. Both the
ambitions and the challenges of German foreign policy have increased. Political actors now
more often see themselves confronted with problematic cases in which the pursuit of values
and interests, but also quite specifi c goals of German foreign relations, tend to come
into confl ict more quickly. In other words, in times in which it has become impossible to
continue to formulate and implement the paramount – and surprisingly stable – goals of
German foreign relations without running up against contradictions, an open and transparent
debate on Germany’s role in international affairs can provide orientation, expertise,
and a socio-political basis for foreign-policy decisions. In view of the growing interconnectedness
of external and domestic problems and the question of what politics is still capable
of achieving, not to mention the crisis-ridden development of European integration, an
increasingly high-profi le (and in part more risky) foreign-policy commitment, and growing
budget constraints, foreign policy action will inevitably be faced with increasing demands
to publicly justify itself. Under these conditions it will be possible to reach a viable consensus
on Germany’s foreign relations only if the general public is perceived, more than it has
been so far, as a (critical) partner in foreign policy.
It is not a matter of mindlessly repeating the mantra that German foreign policy lacks
a defi nite line or joining in with the outspoken demands for an overhaul, based on the
assumption that it has failed to clearly defi ne its interests. This would suggest that an
explicitly formulated list of interests – which, by the way, can easily be found in German
government programs – would make it possible to formulate a clear-cut, unambiguous
foreign-policy roadmap. There is certainly a need to critically assess the foundations of
Germany’s foreign relations; but modern, practical foreign policy is bound to remain
contradictory to some degree. Instead of abstraction, what therefore appears necessary is
efforts to render foreign policy transparent in its various fi elds with a view to identifying
a corridor of strategies and options that can help guide political decision-making.
The project “Compass 2020 – Germany in International Relations – Aims, Instruments,
Prospects” is the Friedrich-Ebert-Stiftung’s contribution to this discussion. The

compass is an age-old instrument used for the purpose of orientation, long since replaced
by radio navigation and GPS. Using these modern devices we put our trust in individual
items of information concerning our position, while understanding less and less of the
context. Seeking orientation with the aid of a compass calls for knowledge of the context
in order to be able to identify landmarks, and often it is precisely the weak signals and
pointers that lead us in the right direction. Compass 2020 supplies this context and at the
same time is intended to prompt a discussion on foreign-policy strategies.
This is also refl ected in the structure of the individual articles (www.fes.de/kompass2020),
which are intended to provide an overview of the most important themes and
regions involved in Germany’s foreign relations. All the articles have the same structure:
they begin with a “framework” section on the most important developments, the greatest
challenges, and the central actors in the policy fi elds and regions concerned. Section 2
analyzes the role, strategies, and perceptions of German policy so far. The “scenarios”
section then outlines plausible alternative scenarios illustrating how the policy fi eld
might develop over the next 15 years and what the driving factors could be. Finally, Section
4 – “options for action” – formulates possible approaches for German and European
policy. The present text examines a number of fundamental issues of German foreign
relations, provides an overview of the most important trends in international relations,
develops three scenarios on international politics, and briefl y formulates – based on the
numerous ideas and proposals presented in the individual articles – priorities that German
policy might pursue in international affairs.
But prospective, creative thinking is more a matter for the many than for the few. The
scenarios and options for action developed here should therefore be understood not as in
any sense a fi nal word but rather as a starting point for and invitation to a discussion on
the prospects of Germany’s foreign relations, to which the Friedrich-Ebert-Stiftung will
continue to contribute within the framework of events and discussion forums.
II. NEW WINE IN OLD BOTTLES? – FOUNDATIONS OF GERMAN POLICY IN
INTERNATIONAL RELATIONS
II.1 The “wonder of continuity” 1
Contrary to what passing fads might sometimes lead us to believe, the foundations of
German policy in international relations have remained very stable over recent decades.
This is all the more surprising because Germany has been more affected by world-political
upheavals than virtually any other country. It therefore at least seemed reasonable to
assume that these tectonic shifts would shake the foreign policy foundations of a country
that straddled the boundary line of the global confl ict that had just come to an end.
But little has changed in the core elements of Germany’s foreign relations since the
mid-1950s. These include the country’s commitment to use foreign policy to come to terms
with Germany’s past, its Western orientation, its skepticism regarding military force and
renunciation of traditional power politics in international affairs, its integration efforts and
deliberate renunciation of a measure of its sovereignty, its efforts to promote peace and
security throughout Europe, and its worldwide respect for international law and human
1 I would like to thank all my colleagues from the “Compass 2020” project for interesting discussions
and helpful comments on the present text.
207

ights. A brief glance at the German government coalition agreements and political position
papers of the last 20 years is suffi cient to show that the sections dealing with international
relations are for the most part concretizations and variations of these core tasks. In
its 1998 coalition agreement, the Red–Green German government introduced some new
points of emphasis as regards global issues (mainly concerning development, environmental,
and arms control policy); in 2002 the “war against terror” was added as a new challenge
in world politics. In the agreement establishing the present Grand Coalition we fi nd, alongside
the familiar “construction sites” (European integration, Atlantic partnership, security
and stability throughout Europe, with Russia as a central partner, and efforts to overcome
the North–South divide) and some central global challenges (terrorism, human rights, and
proliferation), a special reference to promotion of sub-and interregional cooperation, as
well as a commitment to a “comprehensive security concept”.
In recent years Germany has experienced two more fundamental foreign-policy debates
that at least questioned this continuity. In the fi rst years following Reunifi cation, the
discussion revolved around whether Germany should engage more in power politics (keyword:
“normalization”), maintain its previous foreign-policy course, or step up its efforts to
civilianize international relations (keyword: “civilian power”). The proponents of realism
and “normalization” concluded (and in part demanded) that in view of its rise to the status
of “Europe’s central power” (Hans-Peter Schwarz), its new “central position” in Europe, its
increased population due to Reunifi cation, and structural changes in the international system
Germany could now – in contrast to past foreign-policy debates (keywords: “Western
orientation”, “treaties with the Warsaw Pact states”, “closing the arms gap”) – take a more
independent tack in formulating its foreign policy and so open up new strategic options.
The proponents of continuity in foreign policy opposed this view, pointing to the successes
to which voluntary integration in cooperative multilateral processes had led. For the future,
a “Europeanized” Germany would be best advised to forge ahead with deepening and expanding
European integration, maintaining its good relations with tried and tested international
institutions. For their part, the representatives of the civilian-power approach took
the view that, against the background of a more complex world-political setting, Germany
now had a greater responsibility – but also a greater capacity – to work towards the rule
of law, protection of individual and collective civil rights and liberties, and a reduction of
pronounced social and economic disparities.
The call for Germany to pursue a more “self-assured power politics” more strongly
oriented towards national interests largely faded away unheard at the end of the 1990s.
The “wonder of continuity” (Josef Joffe) has also turned out to be the decisive factor in
German foreign policy in the Berlin Republic. But in 2003 the debate was renewed. In
part with the old cast, one variant of the debate on “continuity and change in German
foreign policy” was replayed – this time, though, more closely tied to political decisionmaking
processes. What triggered the debate was the Red–Green Coalition’s break with
US foreign policy. But there were other reasons as well, in terms of which the German
government’s behavior was interpreted either as a process of political emancipation or as
a negligent break with the principles on which German foreign policy success was based;
examples included the accusation of German pursuit of self-interest in EU budget policy,
the ongoing blockade in NATO, the close relationship between Germany and France, or
Germany’s aspiration to a permanent seat on the UN Security Council. For some observers,
the “foreign policy based on enlightened self-interest” called for in robust terms by
Chancellor Schröder and the talk of a special “German path” signaled (at last) Germany’s
208

“return to the world stage”; others would have preferred to cancel this appearance altogether;
while others spoke of a general erosion of Germany’s power to shape policy in international
institutions. 2 But even the German government’s decision – which provoked
brief but fi erce public discussions in Germany – not to take part in the war in Iraq failed
to lead, at least in the medium term, to more intensive efforts to deal with fundamental
questions of Germany’s foreign policy.
Nevertheless, what remains from these latent debates is an increasing suspicion that
the paradox of continuity in foreign policy in a rapidly and fundamentally changing environment
is now leading to more confl icts in decision-making and action, and that it is
becoming increasingly diffi cult to formulate and implement the priority goals of German
foreign relations – laid down on the basis of societal and cross-party consensus – as if
nothing had changed. The limits of continuity are becoming visible.
II.2 The limits of continuity
Germany’s diffi cult broker role
In the past German foreign policy was characterized by the political will to bridge
differences and successfully apply the principle of “both/and”: France and the US, European
integration and transatlantic partnership, EU enlargement and consolidation. In
recent years, however, it has grown increasingly diffi cult for Germany, in looking for
political solutions, to maintain this equidistance and at the same time do justice to its
role as honest broker and bridge-builder. The overextension of this principle is due above
all to a crisis of the institutions through which these compromises were mostly reached. 3
But induced by world-political changes, Germany’s most important partners have also
altered their political course, and this reorientation has made it much more diffi cult to
fi nd common ground.
This instability is most clearly in evidence in Germany’s transatlantic relationship. If
in the past the principle applied in Germany’s efforts to mediate between European integration
and transatlantic friendship was a carefully considered “in dubio pro America”,
transatlantic relations have, within a few years, experienced an emotional roller-coaster
ride – from “unreserved solidarity” after the 9/11 attacks to the termination of Germany’s
allegiance over the Iraq war and the frosty relationship that resulted. While even a
few short years ago Richard Holbrooke could still – in an entirely positive sense – term
transatlantic relations as “one of the most boring issues on the circuit, one that the policy
freaks have fun with, year in, year out, at conferences like the Munich ‘Wehrkunde‘ ”, today
nobody is talking about stabilized boredom. Something similar can be said of the largescale
construction site that Europe now is; here Germany in particular has in past decades
done its best to strike a diffi cult balance between enlargement and consolidation, and thus
to mediate between the interests of the member countries and the EU’s neighbors. More
recently, however, the tensions between internal and external governance capacity appear
to be intensifying. And there are growing differences between the winners and losers of enlargement
and between those that see effi ciency as the sine qua non of enlargement, others
2 Gregor Schöllgen, Der Auftritt – Deutschlands Rückkehr auf die Weltbühne, Berlin 2003;
Gunther Hellmann, Sag beim Abschied leise Servus – Die Zivilmacht Deutschland beginnt ein
neues “Selbst” zu behaupten, in: Politische Vierteljahresschrift, 43, 2002; Hanns W. Maull, Auf
leisen Sohlen aus der Außenpolitik, in: Internationale Politik, 58/9, 2003.
3 Dieter Senghaas, Deutschlands verfl ochtene Interessen, in: Internationale Politik, 50/8, 1995.
209

who would prefer fi rst to stabilize Europe’s young democracies, and others still who seem
intent on using enlargement as a means of subverting efforts to deepen European integration.
In the discourse on Europe, it seems, the both/and posited by the dual challenge of the
integration process is more and more assuming the character of an either/or that requires
an unambiguous decision in favor of one aim or another.
Institutional weaknesses
Germany has always accorded a large measure of consideration to the interests of
other actors and institutions when it came to defi ning its own foreign-policy interests.
But Germany’s strategy of “intertwined” or “institutionalized” interests has never been
either selfl ess or without concrete aims, as was sometimes insinuated in post-reunifi -
cation debates; indeed, mindful of the need to develop political power and to bolster
national prosperity, Germany has also pursued a number of highly self-interested goals.
The two pillars on which the successes of this strategy rested in the postwar era were
Germany’s strong political partners and, above all, effective multilateral institutions.
Germany will – on the one hand – have to continue to exercise the major part of its
international responsibilities in the European context. On the other hand, complaints
are increasing about the alleged exhaustion of the European integration process. The
European Constitution has been shelved, at least for the time being, Europe’s internal
structural heterogeneity is growing, and projects designed to deepen and enlarge the
EU are highly contentious. Europe lacks “charismatic” projects, and the German–French
axis often seems to be more a sort of “bilateral unilateralism” than the driving force
behind the European integration process. The “Europhoria” previously encountered in
European societies has given way to the insistent question: “Why Europe?” – to which
only lukewarm responses are forthcoming. Other “anchor institutions” of German policy
in international affairs are not much better off: NATO is searching for a new raison d’être,
the UN is groaning under the burden of its outmoded structures, and the World Trade
Organization is not seen as having much chance of becoming the backbone of a stable
and fair world trade regime.
Germany’s traditional roles in international politics – as a “motor of European development”,
a transatlantic partner”, a “civilian power”, an “integrated trading nation”, or
an “honest broker” – are, however, closely bound up with these institutions. 4 Today the
erosion of its ability to shape and sustain policy raises the question of how Germany is
consistently to do justice to these roles in the future.
Contradictions
The increased demands on Germany’s role in international affairs, the diffi cult foreign-policy
environment, institutional weaknesses, and the need for a strategic foreignpolicy
debate have led to an increase in goal confl icts and practical dilemmas in German
foreign policy – or at least to their greater visibility. 5 They are often traced back to tensions
between (material) interests and (normative) ideas, linked to the exhortation that
4 Adrian Hyde-Price, Germany and the European Order: Enlarging NATO and the EU, Manchester,
2000; Hanns W. Maull/Sebastian Harnisch (eds.), Germany as a Civilian Power: The Foreign
Policy of the Berlin Republic, Manchester, 2001.
5 Ludger Kühnhardt, Wertgrundlagen der deutschen Außenpolitik, in: Karl Kaiser/Hanns W.
Maull, Deutschlands neue Außenpolitik, Band 1 Grundlagen, Munich, 1994.
210

it is now high time that Germany got around to defi ning its interests more clearly. Both
aspects fi gure prominently in the stock of justifi cations cited for German policy in international
relations – and will continue to do so. A foreign policy restricted solely to the
pursuit of material interests will be no more sustainable than a moral foreign policy that,
relieved of political realism, seeks to evade the ongoing political debate.
Another look also shows us that these contradictions cannot simply be ascribed to
the frontline supposedly drawn up between power and morality. This has become clear
in recent years, for example, in terms of the two basic maxims of Germany’s foreign relations
– “War never again” and “Auschwitz never again”. Skepticism concerning the use
of military force runs up against the conviction that intervention is virtually the only way
of preventing genocide and massive human rights violations. In the case of Kosovo this
contradiction was aggravated by the confl ict between a multilateralism rooted in principle
and participation in a coalition of the willing, here resolved quite differently than in
the case of the Iraq war. In the run-up to the Lebanon mission, fi nally, the discussion was
complicated by the question of whether Germany’s historical background might be seen
as a reason for, or precisely against, involvement in the confl ict.
These contradictions are most evident in security policy because the most serious
changes to the foreign-policy environment have become manifest there. Germany, in the
postwar era more a “recipient” than a “provider “ of security, has been subject to the most
stringent restrictions in this regard. But practical dilemmas are increasing in other fi elds
as well, such as human rights policy, foreign-trade policy, and European policy. And it is
precisely external trade policy that in recent years has developed more and more into an
embattled policy fi eld in which social (and environmental) resistance is forcefully articulated
and interest confl icts are often played out between the “winners” and “losers” of a
continuing process of worldwide market liberalization.
In essence, the problem is how best to translate a set of basic – though usually quite
generally conceived – material and nonmaterial convictions (which largely constitute
continuity in this respect) into practical, task-related options. Concrete goal confl icts, the
constraint to reach ad hoc decisions, limited resources, and integration in international
institutions are important factors infl uencing policy formulation and necessarily clash
with the basic values underlying foreign policy, such as too abstractly formulated material
interests.
Overextension
The accusations of discontinuity leveled at the Red–Green Coalition – “Schröder as
the ‘demolition man’ of Kohl’s foreign policy” (Frankfurter Allgemeine Zeitung) – or the discussion
over Chancellor Merkel’s “new” foreign policy as the new parliamentary session
got under way are political surface symptoms of a dilemma that is now taking on more
discernible contours. What has become clear is that while the basic maxims of German
policy in international affairs will retain their validity, they will lose some of their guiding
power when it comes to a number of acute problems. It would seem both correct and
important to point to continuity as long as what is at issue is the foundations on which
any German foreign policy must rest. To this extent, the core stock of basic values and interests
informing German foreign policy are not in question here; rather developments in
international politics are forcing Germany to rethink the means and instruments it uses
to achieve them. Continuity as a maxim must not be used as an excuse to avoid thinking
211

about new strategies to ensure that these principles are in fact applied even under the
conditions of an altered foreign-policy environment.
Modern, practical foreign policy is bound to remain contradictory. Under the conditions
of complex international relations, and in view of the new challenges facing German
foreign policy, it will not always be possible to derive consistent, contradiction-free
options for action even from a catalogue of seemingly precisely defi ned interests. And
bold public calls for a “more unambiguous” defi nition of the interests guiding German
foreign policy must not be allowed to obscure this point. It is precisely for this reason
that Germany’s policy in international affairs is in need of a broad and intensive public
debate, which of course cannot defi nitively establish concrete political implementation,
but can provide an orientational and supportive basis for action.
212
II.3 The end of amicable disinterest?
It appears that the constantly invoked broad consensus on the principles on which German
foreign policy is based has so far masked the need for a political debate. This is not
least a sign of the success of German policy in international relations in recent decades.
Many MPs are interested in foreign policy only on an ad hoc basis. Political energies tend
to fl ow into areas in which the distribution of economic resources is at stake – for instance,
labor-market and social policy or health care and tax policy. Foreign-policy issues rarely
give rise to party-political disputes, and play a role within parties only when the lines of
confl ict cut straight across party lines, as in the debate on closing the missile gap with Russia.
In addition, neither government nor opposition are often forced to deal with critical
attacks or alternative concepts. The strategic community, the expert culture consisting of
associations, think tanks, and NGOs and otherwise constituting the core of a contentious
public sphere, has relatively little to say when it comes to foreign-policy issues. One reason
for this may be that compared with other policy fi elds, foreign policy continues to be rather
hermetic. The concrete motives, guiding principles, and strategies embraced by the limited
number of foreign policy actors are for the most part only vaguely familiar, and are seldom
made explicit. The legislature’s – de facto rather limited – infl uence on foreign policy and
the fact that foreign-policy decision-making is generally concentrated in small government
circles also narrows the relevant political discourses and hampers public debate.
While hitherto foreign-policy decision-making has often run ahead of public opinion,
in future the public will have to be considered more as a partner in the making of foreign
policy: political analysis, political debate, and political action need to be more closely
dovetailed. More intensive communication on foreign policy themes, including public
refl ection on important issues, but also better parliamentary participation, could serve to
boost the relevance of expert opinions and analyses, create more transparency, and give
new orientation to foreign-policy decisions, enhancing their legitimacy.
Subtle differences
Nowhere does the programmatic consensus among the parties appear to be so broad
as in foreign policy. A major part of the business of foreign policy is ad hoc crisis management,
which does not offer politicians much scope for making their mark. Nor is there any
reason to expect Germany’s role in international affairs to become the subject of sharp domestic
controversies among the parties in the years to come. Given the need for a broader
debate in society on Germany’s foreign-policy orientation, however, the parties should, in

the years ahead, pay far more heed to the formulation of foreign-policy strategy. The initial
concern will be to formulate, for the fi rst time, a set of medium-term ideas on Germany’s
foreign-policy orientation, going beyond how to deal with the next EU accession candidate
or discussion of foreign intervention in the current crisis region. This debate will serve
to accentuate, more than in the past, the subtle programmatic, but above all the strategic
differences between the different approaches. When it comes, for example, to the issue of
greater German military engagement abroad or the state of transatlantic relations, the lines
of confl ict will tend to run not only between the parties but also right through them.
For Social Democracy, freedom, justice, and solidarity are guiding principles of international
politics, 6 and they hold in a globalized world as well, albeit under more diffi cult
conditions. As already mentioned, what is needed is to determine, with reference to these
basic values, what means and strategies are best suited to achieving the traditional goals
of Social Democratic politics under the conditions of changed international relations.
Substantial progress has been made in realizing the basic value of freedom, for example,
with the establishment of international criminal tribunals, the creation of the
Offi ce of the UN High Commissioner of Human Rights, some progress on international
law, and the most recent reform measures adopted at the United Nations (Human Rights
Council, Responsibility to Protect, and Peace Building Commission), all of which appear
to have met with broad acceptance among different political currents.
Apart from a number of dossier questions that even today have opened up differences
between the major parties (for example, the issue of Turkish accession to the EU), the dividing
lines between conservative, liberal, and social democratic foreign policy are likely
to be drawn above all with reference to the issues of social justice and global involvement,
government and governance, as well as the regulation of international relations and attempts
to put them on a legal basis. Social Democracy’s comprehensive idea of equality,
which goes beyond the minimalist – primarily liberal or conservative – version of rights
of privacy vis-à-vis the state and also includes a materialization of rights of equality, must
also be concretized in international politics. What characterizes progressive politics in
international relations is not only the specifi c development-oriented debate about the
consequences of oppression, persecution, and repression, but also the use of collective
measures to eliminate the quasi-feudal structures of global inequality. Social Democratic
foreign policy should seek to establish global equity, much as in the case of freedom, as
a strong reference point right across the policy fi elds of international relations – from
poverty reduction and climate policy to technology and security issues.
Roughly the same can be said of the role of governance and collective decision-making
processes in international relations: while liberals and conservatives tend to play down
the aspects of governance and the state in the international arena, limiting them to issues
of elementary security (the latter also showing a tendency to pursue particularist or communitarian
strategies), a progressive foreign policy sees in efforts to create effective and
inclusive institutions and to regulate international relations and put them on a legal basis
opportunities to civilianize both international politics and the transnational economy. Market
state or the reconstruction of political sovereignties, a partial, morally induced concern
with the social question, or efforts to build an “organic solidarity” (Durkheim) 7 – the responses
to many pressing challenges of international politics, such as climate, the environ-
6 Wolfgang Thierse (ed.), Grundwerte für eine gerechte Weltordnung, Frankfurt, 2003.
7 Mathias Greffrath, Was heißt links, Die Zeit, 29, 14 July 2005.
213

ment, technology, the world economy, energy, migration, but also terrorism will be closely
interlinked with these two sets of questions – governance and equity.
Often a broad global perspective on international relations is too general and abstract,
and the great number of individual dossiers too minutely detailed and disparate to put
together a convincing and attractive policy package in the fi eld of foreign policy. What
is needed here is an intermediate level that brings both aspects together, giving focus to
foreign policy without losing sight of the interdependencies in international relations.
As far as strategy formation is concerned, Social Democracy can draw on times in which
foreign-policy visions and concepts were developed for the longer term, while always being
bound up with the day-to-day business of politics: “new Ostpolitik”, “change through
rapprochement”, “common security”, and “structural incapacity to launch an attack” were
medium-term political projects of this kind, implementing basic Social Democratic principles
of international politics. Even today they remain the hallmarks of Social Democratic
foreign policy, and have contributed to some comprehensive changes: détente,
perestroika, German unity. The credo of the North–South Commission, “development
policy is peace policy”, is currently more than ever the key to understanding the contexts
of international politics. Today it is certainly no easy task to formulate such clearly
defi ned projects and to translate them into viable policy – the global challenges have
become more numerous, the interdependencies more complex, the actors involved more
multifaceted, and the possible political successes more uncertain. All the more reason,
then, to launch a political debate on these issues.
214
III. IN THE JUNGLE OF WORLD POLITICS
III.1 Interim times
One thing typical of interim times is that they are periods in which world-political
upheavals have already swept away the old structures and patterns of political action,
without the new ones yet becoming visible. There frequently are struggles over new interpretations,
new visions of the future are outlined, and political strategies are tried out
and rejected in turn. Interim times are ambivalent. They create uncertainty, though they
also offer new spaces for the reformulation of policy.
The “balance of terror”, the Cold War’s repressive pattern with its clear-cut rules
and routines, has dissolved in a world in which the classic patterns and mechanisms
of political categorization no longer operate. “Uncertain”, “complex”, and “in constant
change” are the attributes most frequently used to describe world politics today. The
fact that the boundaries between domestic and foreign policy are becoming increasingly
blurred, national processes are closely intertwined with global developments,
and world-political action is widely networked, interdependent, and interconnected, is
now, just about everywhere, a standard formulation in political science treatises and
programmatic political speeches. The need to come to terms with this interdependence
and complexity has been recognized for some 15 years now as one of the central challenges
facing political action. The important features of this new complexity are: the
tensions between transnational networks and national sovereignty, the discrepancy
between global problems and effective capacities for solving them, the appearance of
new (transnational) actors on the international stage, the breakdown of a single, over-

arching “strategic narrative”, the ambivalent results of political intervention, and the
new role of identity in international relations.
The large number of discourses regarded as fundamental in international politics
clearly shows that it has become more diffi cult today to conceptualize concisely the phenomenon
of “world politics”. The end of the “short twentieth century” 8 saw the emergence
of a series of competing worldviews that differ clearly regarding the determinative
social forces of the present world order, the role and the forms of morality and power
in international relations, or the probability of war and peace. Depending on individual
tastes and inclinations, democratization, globalization, technology and cyberspace,
identity, and knowledge are identifi ed as the basic currents dominant in world politics.
The range of the central political forces at work here extends from tribes and ethnic
groups, new nationalisms and cultural regions, through regional organizations, investment
banks, and transnational corporations to global institutions, NGOs, knowledge
networks, or the various forms of media. 9 And the apotheoses of these narratives could
hardly be more different, with some projecting the crises of the present into a dire future,
while others depict a global village and a world with extensive zones of peace.
This all got under way with Fukuyama’s End of History. Having reached this point, it
is claimed, means not only that Western-style liberalism has carried the day over Sovietstyle
communism, but also, in the long run, the end of wars between nations. For the
time being, the argument goes, the world is divided into one zone in which a durable
“democratic peace” is in the process of realization and another zone in which nationallevel
confl icts will continue to emerge. It is further argued, however, that its victory in the
“struggle for modernity” will sooner or later enable the Western model to pacify this zone
as well. Interpretations that focus more on globalization as the driving force of world
politics have, since the early 1990s, been working on a picture of the end of sovereignty in
a borderless world (Kenichi Ohmae), a world in which, it is suggested, economic globalization
and technological progress will render the world’s borders more porous, paving the
way for the gradual disappearance of the nation-state. Nowadays an Indian radiologist
may analyze X-ray images overnight for US hospitals; and Bangalore and Boston have
become neighbors in a globalized world. It is often argued that the dotcom boom, outsourcing,
offshoring, and further differentiations of the international division of labor,
growing and prospering middle classes in the emerging countries, the entry of India,
China, and Russia into the global economy, as well as technological networking and improved
exchange of knowledge have created a level playing fi eld for the world economy:
the world has become fl at (Thomas Friedman)!
In view of the violent breakup of Yugoslavia, the “discovery” of Islamic fundamentalism,
and the growing disparities between and within the world’s societies, however, doubts
accumulated concerning whether the much advertised triumph of liberalism and globalization’s
promise of prosperity for all would in fact be realized so quickly. Instead of focusing
on universalist ideas of the world, these images were more strongly keyed to confl ict, fragmentation,
and the “unfl at world”. Samuel Huntington’s image of the clash of civilizations is
certainly one of the most controversial, but also most politically infl uential. Here, cultural,
ethnic, and religious identities become important factors in the development of the coming
world order. In the process sharp confl icts are likely to develop along the borders of civiliza-
8 Eric Hobsbawm, The Age of Extremes: The Short Twentieth Century, 1914–1991, London:
Michael Joseph, 1994.
9 Greg Fry und Jacintha O’Hagan (eds.), Contending Images of World Order, New York, 2000.
215

tions – what German geographer Alfred Kolb called “culture continents”. Huntington sees
the interests and role of “the West” in the globalized world threatened by the Confucian and
Islamic regions’ gains in economic, political, and demographic power – and in particular
by a possible alliance between them. Robert Kaplan’s essay “The Coming Anarchy”, which
was faxed to all US embassies in 1994, focused on the fragmentation or “Balkanization” of
the world. Kaplan saw the collapse of a number of states in West Africa as a harbinger of a
zone of anarchy that, characterized by a mixture of demographic developments, social collapse,
new wars, and massive environmental problems, was bound to increase the pressure
on the prosperous parts of the world. Robert Cooper’s The Post-Modern State and the World
Order may be seen as a variant here, but it is also one of the few pictures with a European
perspective: the triptych it presents consists of a postmodern world defi ned largely by the
European Union, and characterized by transparency, close interlinkages, and relinquishment
of national sovereignty; a modern world that continues to be dominated by the logic
of the system of nation-states and the iron law of sovereignty; and a premodern world
characterized by confl ict and failed states. The long-term goal is, accordingly, to extend the
postmodern zone. If the premodern world threatens the other worlds, Cooper argues, they
should respond with a “liberal imperialism” that imposes human rights and law and order
– if necessary by creating “liberal protectorates”. Cooperative worldviews have a hard time
of it in this debate. Two examples that might be cited in this connection are Rostow’s The
Coming Age of Regionalism, which sees regional cooperation organizations going through a
phase of consolidation and becoming important building blocks of global governance, and
the notion that the common and interrelated problems facing our endangered planet may
also lead to new forms of global governance.
This struggle between interpretations is not merely a matter of academic exercises; these
images of the world, for the most part highly accessible, frame the political debates, provide
orientation, and so become increasingly attractive precisely in times of uncertainty. 10 Not
least, a number of concrete strategies and options for action are based on them.
216
III.2 Options for action
We can distinguish three different options concerning how politics should respond
under the conditions imposed by complex structures of order.
New foes
Many of the abovementioned world pictures depict worlds divided into two: Fukuyama’s
End of History breaks the world down into democracies and non-democracies,
Huntington’s Clash of Civilizations pits the West against a Confucian–Islamic alliance,
and in Robert Kagan’s world Mars (America) and Venus (old Europe) vie for the interpretation
of the world and the understanding of power and morality. 9/11 was the catalyst
that brought together, in one political strategy, a number of interpretations previously
thought to be incompatible. From Fukuyama’s “the West is the best” and Huntington’s
“the West against the rest” emerged the political idea of the “good civilization”: 11 from
10 Paul Reuber/Günther Wolkersdorfer, Auf der Suche nach der Weltordnung? Geopolitische
Leitbilder und ihre Rolle in den Krisen und Konfl ikten des neuen Jahrtausends, Petermanns Geografi
sche Mitteilungen, 148, Heft 2, 2004.
11 Graeme Herd/Martin Weber, Forging world order paradigms – “Good Civilization” vs. “Global
Terror”, in: Security Dialogue, 32/4, 2001.

Fukuyama it inherited the notion that the model of the Western democratic market
economies could without further ado be transferred successfully to all other regions and
countries. And from Huntington it received the conviction that the “good civilization”
bloc is in a position to formulate a common will and that there is no neutral ground in
the confrontation – “Those who are not with us are against us”.
The popular German scare literature on the economic rise of Asia, for example,
Weltkrieg um Wohlstand [The War for Wealth], tends to underline Germany’s frontline
position vis-à-vis the “Asian attackers”, and then calls for the creation of an “economic
NATO”. In the West – and most infl uential worldviews are of Western origin – there
appears to be a new longing for more clear-cut contours in world politics. New, seemingly
clearly defi ned dichotomies are now to close the gap in our worldview left by the
vanishing of the friend–foe schema of the Cold War period, the aim being to reduce the
complexity of the political environment. The charm of clear-cut fronts is that they tend to
mobilize, polarize, and provide orientation; but instead of leading to adequate solutions,
they for the most part lead only to political dead ends and spurious certainties.
Political bankruptcies
In view of the complexity or “general drama of politics”, others – not without interests
of their own – are already calling for the instigation of bankruptcy proceedings, claiming
that the possibility of any effective, change-inducing, and effi cient collective action
has come to an end. In this view, politics, mostly commented on in cynical terms, is at
best capable of moderating, suppressing problems, or cosmetic corrections. Talk of the
“delusion of feasibility” does no more than paraphrase the desire to retain the status
quo. Variants include constant references to the “reform logjam” and related complaints
about the state, its political class, or the intransigence of its citizens, as well as an effusive
crisis discourse, coupled for the most part with a good measure of cultural pessimism.
In the end, these two views lead not to constructive efforts to attain new scope for action
but on the contrary to a further delegitimization of political action – and occasionally to
outbursts of antidemocratic sentiments as well.
Doing it the hard way
A third option is – admittedly – the calmest, the least tangible in ad hoc terms, and
the most diffi cult to sell – but in the long run it will nevertheless prove to be the most
promising. It is predicated on the assumption, fi rst, that complexity, be it on a European
or a global scale, must be endured; second, that global conditions are shaped in accordance
with ideas and interests, not without engendering uncertainties; and third, that it is
therefore worth trying to come to terms with complexity, without falling prey to a naïve
optimism about governance. The dominant insight here is that binding global regulatory
frameworks and bodies of rules have contributed to civilizing relations between states
(and within states); that global and regional cooperation lead not to more but to less complexity,
since trust serves to reduce complexity and uncertainty as well as to regain room
to maneuver; that what is therefore needed in turbulent times is not any self-granted dispensation
from global rules but steadfast efforts to further develop a global governance
that at present is still selective in nature; and fi nally, that what we have reached is not
the end of history but only the beginning of a discussion on effi cient and viable policy
networks of regional and global scope.
217

218
III.3 Jet stream and grounding
Coming to grips with complexity will not be an easy task. There is little reason to
believe that the picture will begin to brighten soon. As an overarching trend, the “jet
stream” 12 of international politics, globalization will continue to be the key frame of reference
for the relationship between economy, politics, and society and to determine political
discourses. At the same time, uncertainty may be seen as constituting the “grounding”
of social development, against which background options and strategies of political action
are developed.
Globalization
The narrow form of globalization – the compression of economic processes and
market penetration – will continue to gain ground, boosted above all by technological
progress (communication, information, and transportation) and its further diffusion.
The consequence will be a growing accentuation of the effects of globalization and challenges
in other areas – for instance in terms of patterns of culture and consumption or
of political control – as well as a growing awareness of the signifi cance of global developments
for society and individual personal development.
But the Janus face of globalization has continued to take shape. The process of globalization,
at least in its current form, is a long way from pursuing the path to the “global
village”. While it may be said to have a homogenizing effect by incessantly penetrating
new regions and countries and integrating markets, at the same time globalization tends
toward fragmentation by generating development and confl ict alike, opening up opportunities
for societies but increasing their vulnerability, producing both winners and losers,
and deepening the divide between those who are “networked” and those who are
“disconnected”. The splendor and the misery of globalization clash both between and
within societies: social integration but also marginalization, stable but also precarious
social and economic conditions, global lifestyles and a longing for the “authentic” here
confront one another.
But “globalization”, the embattled key concept of the 1990s, is bound to lose some of
its ideological clout in the industrialized Western countries. The proponents of a euphoric
globalization project, who emphasize the blessings of globalization, and its dedicated
opponents, who point darkly to the curse of the global economy, have already made way
for a more sober-skeptical view of the matter: here globalization is neither good nor bad,
but a process some of whose individual aspects – such as the worldwide networking
made possible by modern information technology – appear to be irreversible, but whose
forms can in principle be shaped politically and so remain contested
Uncertainty
The ambivalent aspects of the globalization process create uncertainty and so contribute
to a basic social sentiment that has intensifi ed in the Western industrialized countries,
too. In many regions of the world a manifest uncertainty associated with the dayto-day
threat posed by hunger, disease, repression, and war has long been a constant of
human development. While there the elementary pillars of human security described
by Kofi Annan – freedom from fear and want and freedom to live in dignity – are all too
12 Albert Bressand, Shell Global Scenarios to 2025, The Future Business Environment: Trends,
Trade-Offs, and Choices, Royal Dutch/Shell, 2005.

often porous, the industrialized countries have experienced the rise of a diffuse sense
of uncertainty, or insecurity, that has attracted more political and public attention than
virtually any other issue.
As early as the 1980s, and in connection with Chernobyl, Challenger, and Waldsterben
[dying of the forests], the fi rst “risk warnings” were to be heard emanating from the midst
of the industrialized societies. In recent years, however, uncertainty has become a permanent
state of affairs, combining different dimensions: internal and external, personal and
societal, military and social. The surrounding world seems “desecuritized”, and what the
unsettled members of twenty-fi rst-century Western “risk societies” (Ulrich Beck) long for
most is “comprehensive security”. Along with freedom and justice, security ranks very
high in opinion polls on what people consider the most congenial ideas, and in three
different ways: security as reliability of regulations and societal continuity; as social, existential
security; and security as personal integrity. 13
There are many reasons for this sense of insecurity. The growing “social vulnerability”
(Manuel Castells) of Western societies is one important factor. A sizable portion of
society has already been forced to bid farewell to “zones of social cohesion”, regular employment
and basic social welfare; others, such as the greater part of the middle classes,
live in constant fear of this precipitous social plunge.
Moreover, confl icts spilling over from an apparently “desecuritized” world into
a Western “normality” believed to be secure and prosperous have opened our eyes to
the vulnerability of modern societies – and not only since 9/11. From the perspective
of Western societies, the largely routinized Cold War confrontation was replaced by a
“new obscurity” that has – as noted often enough – lost its key ideological, regulative,
and military coordinates. While the threat posed by the “balance of terror” appeared to
be manageable, the clear rules of the Cold War no longer apply to today’s uncertainty
phenomena; growing social uncertainty is aggravated by a sense of threat induced by
terrorist attacks, climate change, crime, fi nancial crises, pandemics, and virtual viruses.
Cracks have appeared in the promise of security held out by modernity, which is based
on the notion that risks are increasingly controllable.
Acknowledging risks is certainly not always a rational process. But even without
shrill alarmism and incessant apocalyptic pronouncements, societal insecurity is
bound to become a paradoxical challenge for politics in the years ahead, and political
space must not be sealed off from society’s anxieties. What is called for is careful efforts
to deal with them and – wherever possible – to eliminate their root causes. At the
same time, the desire for security – and the state’s reaction to it – should not become
so great that people come to regard as a refuge a strictly controlled polity that increasingly
restricts their freedom. The need for societal security, which can be satisfi ed only
vaguely, often gives rise to a call for “emergency measures”. In fact, this relies more on
encouraging people to provide for their own security, to relinquish what are claimed to
be “risky” freedoms, to accept the return of the Leviathan state and more social control.
However, the real risks and threats facing societies can best be alleviated on the
basis of a “problem-solving multilateralism” that focuses more on collective security,
cooperative elements, transparency, opportunities for exerting infl uence democratically,
and liberalization.
13 Zygmunt Baumann, Hochseilakte können nur die wenigsten wagen, in: Freitag, 34, 2005.
219

220
IV. FAST FORWARD – ISSUES AND TRENDS IN INTERNATIONAL RELATIONS
The list of political challenges we are unable to deal with without consideration of global
contexts has grown longer and longer in recent years. In our view there are eight issues
that will defi ne discourses in international politics: the global economy, developments
in demography and migration, technological advances, the rediscovery of environmental
and climate policy, the management and protection of resources, human development,
confl ict and security, and issues of government and governance. None of these issues can
be looked at in isolation from the others; in fact, they are in many respects interrelated in
terms of both the problems involved and the strategies that might resolve them.
IV.1 Business as usual? The world economy and global development
Integration …
Thanks to technological advances and better diffusion of information and communication
technology, economic globalization will, in the years to come, continue to integrate
new markets and regions. In 2020 aggregate world output will have reached levels some
two thirds above that of today, exhibiting growth rates similar to those of the past 30
years. The key factors responsible for this development will include the penetration of
new trade markets, increasing capital mobility, and a rapidly growing middle class, not
only with greater purchasing power, but also with higher expectations concerning effi
cient economic management. Worldwide, fi nancial services, media and entertainment,
health, education, and travel will be among the most important growth sectors.
The Western economies will see their share of industrial manufacturing continue
to decline, although most Western countries – Germany above all – will continue to be
important manufacturing locations for high-tech products. Global markets will be dominated
by some 500 multinational corporations, whose international division of labor will
continue to fragment. At the same time, small, highly specialized fi rms will become increasingly
important for niche products and high-tech innovations.
Assuming that current trends continue, the US, mainly due to its young demographic
profi le and high level of innovation, will continue, at least for the coming decade, to be
the world’s largest economy, with average growth rates of 3%. Japan will have trouble
exceeding 1%, and the EU member states are – on average – likely to attain fi gures somewhere
in between, though rates in the new Eastern European member states are likely to
be somewhat higher.
Economic relations between the US and Europe – which at present amount to roughly
2.5 trillion dollars and account for roughly 12 million jobs in the US and Europe – will
remain the world economy’s most important economic axis. In the foreseeable future, no
other bilateral constellation will even come close to reaching the high degree of interpenetration
and integration typical of the transatlantic economy: nearly 75% of the FDI fl owing
into the US comes from Europe (2003), while the US accounts for 65% of Europe’s FDI.
Nevertheless, the economic triad (EU–US–Japan) that has so far set the pace in the
world economy will see itself exposed to greater competition from the emerging markets:
in the next 15 years China’s economy – the world’s workshop – will triple in size and continue
to gain ground, particularly in manufacturing. 14 Unlike India, however, China faces
14 Bernd Reddies, China: Its struggle for stabilization and equal status, Compass 2020, Friedrich-Ebert-Stiftung,
Berlin, 2007.

the problem of having to get rich before it grows old: the declining growth rates forecast for
China from 2012 onwards will be due to the aging of the Chinese population (see Demography
and Migration). India, the global service provider, could turn out to be the world’s
growth champion, and its huge pool of well-trained, English-speaking specialists constitutes
a reservoir of cheap labor and an expanding market for consumer goods. Services in
the fi elds of software development and high-tech research and production of high-grade
goods, for example, for the health sector – the subcontinent already leads the world in the
production of generics – will be the driving forces behind India’s growth. But it remains to
be seen whether India’s “leapfrog” development, concentrated in the highly qualifi ed service
sector and tending to neglect the industrial sector, will prove able to generate suffi cient
jobs for the younger generation, so tackling the social question at least to some extent. 15
Economic expansion in the newly industrializing Asian countries is also fueling the economic
boom presently under way among the world’s large resource-rich and agricultural
economies – above all Russia, the world’s energy pump and major producer of fossil fuels,
but also metals, and Brazil, one of the world’s major producers of food and raw materials
and one of Asia’s major suppliers of iron ore, copper and nickel, soybeans, and beef.
… and exclusion
While for the foreseeable future the large emerging countries will be able to profi t
from the trickledown effect of the world economy, entire regions face the threat of being
left behind. Social disparities will grow both between countries and regions and within
the world’s societies, with an underclass of states crystallizing in the process.
In the coming years the regions with the highest rates of population growth will have
the lowest share of world market growth. The development of the Middle East/North
Africa region depends far more than other regions on rents, and the welfare disparities
between the region’s resource-rich and resource-poor countries are accordingly large.
The region is on the whole poorly integrated into world markets – its shares in world
trade (3.4%) and foreign direct investment (just 4%) are among the world’s lowest – and
it also has a very low level of intraregional trade. Apart from Tunisia and Morocco, there
is little reason to believe that the countries in the region are about to embark on a program
of economic reform or that – even more importantly – the region’s resource-rich
countries are likely to diversify their economies beyond oil and gas production. Israel
alone accounts for 50% of the region’s non-oil exports. But even the region’s resource-rich
countries will face problems in creating suffi cient new jobs to absorb the region’s rapidly
growing working-age population in the coming ten years.
While Sub-Saharan Africa’s 16 share of world trade declined to 2% in 2005, the region
has experienced a gradual upturn at the local level. Its growth rates have ranged around
5%, with resource-rich countries such as Nigeria leading the way in posting strong increases.
But this development starts out at a very low level and the chances are not good
that by 2020 Sub-Saharan Africa will reach growth rates that – as in the case of China
and India – are suffi cient to contribute signifi cantly to reducing poverty; low productivity,
falling prices for agricultural products, growing competition from Asian developing
15 Peter Gey/Matthias Jobelius/Renate Tenbusch, India: Challenges On The Road To Becoming
A World Power, September 2007, Compass 2020, Friedrich-Ebert-Stiftung, Berlin, 2007.
16 Ulrich Golaszinski, Sub-Saharan Africa: the rediscovery of a continent, Compass 2020, Friedrich-Ebert-Stiftung,
Berlin, 2007.
221

countries (for example, in textile production), low levels of foreign direct investment, a
continuing predominance of rural structures, poor infrastructure, underdeveloped middle
classes, political instabilities, and poor governance – all these factors are likely to
exacerbate an economic situation that is already very diffi cult. The region’s only exception
is South Africa.
Compared with the past decade, Latin America’s economic development is likely to
improve, although it will remain far behind the dynamics of India, China, and Southeast
Asia. Led by Brazil, the region is likely to concentrate above all on raw materials and
food. 17 Growth opportunities for the South American economy lie mainly in agribusiness
and mineral processing. As far as the industrial sector is concerned, the countries
of the region are faced with strong competitive pressure, above all from China. Much will
depend on whether the countries in the region succeed in creating a functioning single
South American market and reaching agreement on a joint development model that also
has public support.
While the fl at world (Thomas Friedman) extends to Shanghai, Johannesburg, São
Paolo, and Bangalore, the planet of slums (Mike Davis) will also continue to expand. The
phenomenon of a rapidly growing global middle class able to afford the consumption
characteristic of the Western industrialized countries, as well as an anticipated reduction
in the absolute number of needy and poor people contrasts with the continuing accumulation
of wealth in the hands of the few, a geographic concentration of poverty, and a dramatic
deterioration of the material, social, and health situation in poverty regions. Above
all China and India’s highly successful poverty-reduction efforts are helping to make the
fi rst and most urgent of the Millennium Development Goals (MDGs) (to halve, by 2015,
the proportion of people whose income is less than one dollar a day) at least a realistic
prospect. Between 1990 and 2002, the incidence of extreme poverty declined from 28%
to 21% – in absolute terms, this translates into 130 million people. Even if this positive
trend continues, however, some 827 million people will still be living in extreme poverty
in 2015 (that is, 380 million more than allowed for under the Millennium Development
Goals) and a further 1.7 billion people will have less than two dollars per day to live on.
While, thanks to China’s development, East Asia (16.6%) has already reached the goal,
Southeast Asia (10.2%) is just short of it, and the fi gure for South Asia shows a marked
decline (29.9%), the number of people in Sub-Saharan Africa living in extreme poverty,
in both absolute and percentage terms, has risen in the past 15 years to encompass 46.6%
of the population. In Latin America extreme poverty has declined slightly (14.6%), while
social inequality, more marked there than anywhere else in the world, has continued to
rise. Since 1990, the starting point for the MDGs, 50 countries have fallen behind on at
least one of the goals, and another 65 countries will be unable to reach even one MDG
before 2040, thus missing the target by a whole generation. 18 From the European perspective,
the development of poverty in the former Soviet republics is particularly alarming:
while in recent years most countries have continuously improved their position on the
Human Development Index – a combined indicator made up of income, education, and
health – 18 countries have suffered setbacks since 1990: 12 in Sub-Saharan Africa, the re-
17 Wolf Grabendorff, Latin America: A lot of democracy, not much state and even less social
progress, Compass 2020, Friedrich-Ebert-Stiftung, Berlin, 2007.
18 United Nations, The Millennium Development Goals Report, New York, 2007; UN Millennium
Project, Investing in Development: A Practical Plan to Achieve the Millennium Development
Goals, New York, 2005.
222

maining six on the territory of the former Soviet Union. This would seem to indicate that
the development paths of the developing countries continue to be highly heterogeneous,
with grave consequences for the stability of entire regions.
Uncertainties
Further development of the world economy is bound up with a number of uncertainties,
however. Apart from external events such as war, natural disasters, or a general deterioration
of the security situation (that also threatens supplies of raw materials and energy),
the most important factors infl uencing this development are technological change
and innovation, degree of market interpenetration and integration, design of economic
institutions, and the role of the US.
While skeptical scenarios point to an era of uncertainty that could negatively infl uence
the economic climate, optimistic scenarios proceed on the assumption that fundamental
innovations – such as decoding the human genome or the combined use of
bio-and nanotechnology – and the integration of new markets may well prove able to
spark a sustainable upturn of the world economy. Even though China’s rise will lead to
protectionist outbursts and a number of more or less severe trade confl icts, the world
economy will, on the whole, continue on the present course of liberalization. The US will
profi t less than other economic powers from further market opening and could develop
into an even more diffi cult partner in trade policy – for Europe too. Numerous overlapping
bilateral and regional agreements will regulate trade relations, and increasingly include
social and environmental standards. In the most favorable case this will lead to a
new attempt to establish a global regime, although in the more likely case it will lead to
further disintegration of the regions that have been decoupled from the world market,
to even greater integration of the – already well integrated – industrialized and emerging
countries, or – in the case of a continuing regional renaissance – to a new “regional
mercantilism”. China’s and India’s development paths also continue to be fragile; above
all, unresolved internal social and political transformation processes, the ecological limits
to growth, and energy supply crises could seriously disrupt their economic dynamic.
China, which holds the world’s largest dollar reserves and is an important market and
foreign direct investor, is already so far integrated into the global economy, however, that
a slump in its economic dynamic would have serious repercussions.
According to an even more negative assessment of the global security picture security
costs will continue to rise, leading to restrictions above all in transportation, communication,
and production and trade of high-tech goods. Even though a deterioration in the
security of energy supply could accelerate the search for alternative sources of energy,
in the short term it would mean higher energy prices. In conjunction with a partial protectionism
initially motivated by security concerns – above all in several “old” industrialized
countries – low growth rates could spawn a new economic nationalism, involving
high barriers for transnational corporations and mergers, conditionalities for companies
investing abroad, and – especially in Europe – restrictive migration policies. One major
point of contention in the transatlantic economy will be the US defi cits, which the US
government has been unable to get under control because of its growing defense budgets.
With the economy prospering, the US would be able to deal with these defi cits, but in
a weakened world economy the most important holders of US debt (China, Japan, South
Korea, OPEC countries) might start pulling out of what was once the key world currency.
In view of the possible implications for their own position in the world economy, how-
223

ever, countries such as China could also assume the role of fi nancial good Samaritan,
continuing to support the US dollar, but now turning their new preeminence to political
account, for example, by demanding more weight in international forums or threatening
to veto planned US interventions.
In the years ahead the weal and woe of the international economic institutions will
also depend on transatlantic cooperation and the ability and willingness of the US and
the EU to take greater steps to include the emerging countries in world economic governance.
And assuming that the current dollar–euro relationship continues to hold, any
substantial progress in efforts to give further political shape to the international fi nancial
markets is likely to be halted by US resistance and be restricted to partial aspects that
– such as efforts to control tax havens – are closely bound up with other core issues of
international politics. It remains at least doubtful whether a massive dollar crisis would
create the space needed to work out a new fi nancial market architecture in view of the
distortions such a step would trigger in the world economy.
The interests of a trading nation
The Federal Republic of Germany’s infl uence in international affairs has always been
rooted in its economic strength. More than most countries, the “world export champion”
is reliant on open markets and a functioning global economy, and in recent years
Germany has profi ted greatly from the continuing integration of markets, especially in
Eastern Europe. This implies that Germany’s future prosperity will largely depend on
the stability of world markets and the adaptation of elements of global economic regulation
to the new conditions. A world economy that is generally uncooperative in nature
can have serious implications for a country as highly integrated as Germany. A creative
foreign trade policy geared to cooperation and integration will thus be one of Germany’s
key tasks for the future. 19
While it is true that Germany has an important voice in the global economy, the infl uence
of individual countries – excepting the US – on its architecture is very limited. The
only promising response to this weakness is further integration of Europe – internally,
efforts to forge a strong and dynamic economic bloc (for example, on the basis of a common
competition policy or a revitalization of the European macroeconomic dialogue),
and externally with a view to assuming a major role in multilateral forums in order to
forge ahead with reform of international institutions. The medium-term goal here must
be a complete Europeanization of Germany’s foreign trade policy.
While the international fi nancial system has been spared a major crisis in recent years,
the systemic risks that have time and again destabilized international markets – currency
speculation and exchange-rate fl uctuations, current account equilibria, or the growing
role played by diffi cult-to-control hedge funds and private equity fi rms – are still with us.
The only way to counter international fi nancial markets’ current crisis tendencies is to
put in place a strong, transparent, and democratically legitimized international regulatory
system, including both private-and public-sector actors. Apart from making it possible
to better control market actors, such a regulatory system would also prove helpful
in boosting market stability by renewing debt-relief efforts for highly indebted countries
(for example, by creating an international insolvency mechanism) and establishing controls
on capital movements. The international oversight authorities, above all the IMF, are
19 Michael Dauderstädt/Christian Kellermann, Controlling the risks of a global economy: Germany‘s
role, Compass 2020, Friedrich-Ebert-Stiftung, Berlin, 2007.
224

in need of reform. Such reforms would include in particular a redefi nition of quotas and
voting rights designed to increase the weight of the emerging countries and to improve
crisis management. The prospects of such reform options depend chiefl y on whether and
to what extent the most important international fi nancial centers – in this case mainly
the US and the UK – would be prepared to contribute to stabilizing the system.
Germany’s export-based economy is necessarily interested in a long-term increase in
worldwide purchasing power and the integration of new markets. One aim of German
foreign-trade policy must therefore be to promote the development of – above all – its European
neighbors, but also of less developed world regions, with a view to creating new
long-term market opportunities and using instruments of economic and development
policy to stabilize markets (see Section 5.5).
Germany’s trade orientation will continue to involve a number of obdurate goal confl
icts in foreign policy. As far as some of these confl icts are concerned – for example, arms
exports or trade in sensitive goods – greater efforts should be made to strengthen the credibility
of German policy (for example, in human rights and confl ict prevention) than to
service special economic interests. Other goal confl icts that may have a major impact on
society – for example, efforts to restructure and open up the European agricultural market
or, more generally, ongoing social adaptation – will prove more diffi cult to master.
IV.2 Population matters! Demography and migration
Two worlds
Population development forecasts are relatively stable. While it is diffi cult to predict
the outbreak of war or crisis, and most of the technologies and the better part of the capital
stock that will be in use in 2050 have yet to be created, over 40% of the world population of
2050 has already been born. The United Nations expects the world population in 2020 to
be roughly 7.5 billion people and the equivalent fi gure for 2050 to be some 9.2 billion (2005:
6.5 billion); over half of these people will live in Asia. While between 1950 and 2000 world
population grew by 142%, it is expected to grow only by 49% by 2050 – and then to stagnate
at around that level. 20 The coming 40 years could thus bring the end of massive, global
population expansion, removing from the global agenda the problem of “overpopulation”
in the sense discussed in international relations in the course of the twentieth century.
But population and population development will continue to be crucial factors as far
as international relations and the global economy are concerned. The continuing – albeit
slower – rise in world population – which will, moreover, be regionally concentrated and
go hand in hand with other developments tending to aggravate the situation (urbanization,
desertifi cation, overfi shing, shortages of drinking water, massive proliferation of small
arms) – will increase the pressure on resource allocation, ecological systems, and social
interaction. Regional developments will differ from what we have been accustomed to.
The bulk of population growth will occur in the regions least equipped to cope with it economically,
politically, environmentally, and socially. Asia will continue to have the world’s
largest population, but trends will differ from region to region: while Pakistan and Bangladesh
will face huge demographic pressure, China’s overall population, though it will not
decline, will experience quite abrupt shifts in its age structure: for example, in 2020 there
will be over 400 million Chinese over the age of 65. The most rapid population growth will
20 UNFPA, State of World Population 2007, New York, 2007; United Nations Population Division,
World Population Prospects: The 2004 Revision, New York, 2004.
225

e found in Sub-Saharan Africa, North Africa, and the Middle East, which contain 16 of
the 20 societies with the world’s highest birth rates. In the coming 20 years the population
will continue to grow in central Africa in particular (68%), but also in West and East Africa
(52 and 55%), while the population of southern Africa will stagnate on account of the AIDS
pandemic. The Middle East will experience dramatic growth in the working-age population
(50% by 2025), and this will entail growing pressure on the region’s labor markets. Of the
nine countries that will account for some 50% of the increase in world population (India,
Pakistan, Nigeria, Democratic Republic of Congo, Bangladesh, Uganda, the US, Ethiopia,
and China) only one is a developed, industrialized country.
Various demographic risk factors that will appreciably raise the danger of internal confl
ict will tend to coincide in many developing countries. In the coming ten years roughly
one billion new workers will enter the labor market, 95% of them in developing countries.
21 Particular attention should be paid here to the high percentages of 15-to 24-yearolds
(“youth bulges”); in some cases they account for up to 60% of the population and are
often at massive risk of unemployment. Encouraged by rapid urbanization, they are likely
to prove a social challenge and a serious instability factor (“angry young men”) precisely
where economic opportunities are rare and youth unemployment rates are high. 22
In most developing countries, however, the population will decline, with the average
age of the population rising appreciably. In 2030 nearly one in four West Europeans will
be over 65, while in Sub-Saharan Africa the same age group will account for no more
than 4%. The countries most affected by population decline will be Russia (some 10% by
2025) and the eastern European countries, but also Japan. As far as western Europe is
concerned, Italy, Germany, and Spain will experience a slight decline in their population,
while the UK and France are expected to see their population rise in the coming 20 years.
By 2020, however, Germany will not be tangibly affected by demographic developments
(population contraction), although it will feel the anticipated shift in age composition,
above all in its working-age population. Efforts to ensure that a suffi cient number of
qualifi ed workers are available will become even more diffi cult in this period.
The urban century
Another demographic factor worthy of note is rapid urbanization. Since 2006, “offi
cially” – and for the fi rst time in history – over 50% of the world population has lived in
cities; by 2020 the fi gure will have risen to over 60%. The world’s cities will account for
nearly all of the population growth anticipated in the years ahead. It is in the developing
countries that urbanization will progress at a particularly rapid pace, however. In Latin
America, where even today 75% of the population lives in cities, the trend will continue,
and it will accelerate in less urbanized regions such as Asia and Africa. In ten years Tokyo
(28 million), Mumbai (28 million), Lagos (25 million), Shanghai (24 million), and Jakarta
(22 million) will be the world’s largest urban agglomerations. In the Middle East and
North Africa, where two decades ago only 30% of the population lived in cities, the fi gure
anticipated for 2020 is 70%. Urban agglomerations tend to overlap with coastal regions,
which will be home to some 75% of the population in the coming three decades. Big cities
21 Erfried Adam, Human rights and international social policy: Constraining the anarchy of
power, Compass 2020, Friedrich-Ebert-Stiftung, Berlin, 2007.
22 Countries with high population growth face a risk of civil confl ict twice as high as that found
elsewhere.
226

– in a sense, modern city-states – will become the central units of economic growth and
the production of culture and knowledge, and they will attain more and more infl uence
on (economic) globalization processes. The city will be a place of both opportunities and
problems in condensed form, an enclave of prosperity and of slums. For many people
city life will mean a relative improvement in living conditions, and for the impoverished
rural population in large parts of the developing world, it will represent a place of refuge.
At the same time, it is not only in the developing countries that the urban wilderness will
go hand in hand with major challenges for urban infrastructure and social, education,
and health systems. In the years to come the task of reducing urban unemployment is
likely to be just as important for the stability of entire regions as attempts to fi nd solutions
for the climate problem or progress on disarmament.
Migration
Besides the persistent migration of rural populations to urban areas and forced migration
due to war and natural disaster, transnational migration from poor countries to rich(er)
countries is likely to increase; its causes must be sought in differences in population development,
different age structures, and accentuated economic and social disparities. But
the scope of international migration will depend on a number of factors (such as the social
and environmental situation in the country of origin, public opinion in recipient countries,
immigration regimes, and so on) that are diffi cult to determine in advance. In fact, internal
migration – that is, population movement within national borders – is far greater in scope
than international migration, which at present involves some 170 to 190 million persons,
many of them from the immediate vicinity of political and ecological crisis regions.
In the coming years most migration will be either to the US (the world’s largest net recipient
country for legal migrants, most of them from Latin America and South Asia) and
the European Union (most of it from North Africa, the Middle East, South Asia, and the
postcommunist countries) or within a given region, from less developed to more highly
developed countries. In Europe, which will receive roughly one third of net worldwide
migration, Germany will be the most important recipient country, followed by the UK
and Italy. The most important countries of origin will be Turkey, Egypt, and Iran. By 2050
the UN foresees net migration to Germany of nine million persons (6 million for the UK
and 5 million for Italy). In recent years massive restrictions on permanent immigration
imposed by traditional target countries, growing emigration pressure, but also growth
in human traffi cking have led to a strong rise in the numbers of illegal immigrants, on
which no reliable statistics are available. At the same time, entire branches of industry
are – as in, for example, Spain – wholly reliant on these illegal migrants.
The industrialized nations, with their low birth rates, will actively seek immigration
and be forced to compete for qualifi ed immigrants as a means of meeting their labor
market defi cits.
Countries such as Germany that traditionally have a large share of migrants and appropriate
migration structures are likely to fi nd this easier than, for example, Japan, where
the cultural barriers are so high that they rule out any appreciable growth in immigration.
For the developed countries, this situation may, in the short term, mean a better supply of
labor, but it may also lead to social tensions and cultural confl icts. An economic downturn
in the EU would reduce migrants’ chances of integration, generating an increasingly protectionist
public opinion, but also xenophobia, and in the end attempts to actively attract
immigrants might – in view, say, of security threats – be drastically reduced.
227

In the countries of origin, in turn, emigration of skilled workers and specialists constitutes
a serious obstacle to development. The countries worst affected by this include
African countries with a small reserve of skilled workers, such as Ghana, Nigeria, and
Algeria. As regards India, while 60% of the graduates of Indian technical colleges left
the country in the 1990s, in the meantime this has been compensated for by the large
number of qualifi ed workers the country trains itself and the increasing trend toward
outsourcing work to India. Despite some successful efforts undertaken by prosperous
emerging economies, such as Taiwan, this distribution confl ict is likely to grow in intensity
in the coming years, fuelled by massive attempts by the countries of the North to
recruit new skilled labor.
Crossing boundaries
In the medium term there is little Germany can do to infl uence global population development.
The resources available should be used to implement the decisions taken at the
Cairo Conference on Population and Development (above all with regard to women’s rights
and family planning), and in working out development-policy priorities it would make
sense to accord more consideration to the structure of migration to western Europe. 23
However, in the short to medium term the only viable approach to meeting the demand
for qualifi ed workers must be a combination of managed immigration and improved integration
strategies. At the same time, a (partial) legalization of illegal migration, which has
become a fi xed element of the European economies, could help to stifl e human traffi cking
and defuse the dangerous conditions under which migration takes place. A migration
regime jointly worked out by the European counties will have to defi ne the criteria for
immigration and clarify the issue of family reunifi cation, which accounts for a large share
of immigration to the EU countries. A package of this kind would also include a debate
on the relevance of and the need for continuous immigration, a development for which
Germany in particular is prepared neither in political nor in social terms.
The developed countries’ grab for skilled workers, mostly from developing countries,
to compensate for their own (education-)policy defi cits defi nes a further facet of global
disequilibrium. The countries actively recruiting immigrants will have to deal with the
compensation issues involved, though it has become clear that the relevant measures will
be diffi cult to enforce: at present there is some talk of an exit tax to be paid to the country
of origin by the recruiting company.
In the coming decades the key issues in urban centers will be transportation systems,
resource processing, land management, social infrastructure, and innovative administrative
structures. German municipalities have much to offer in this connection. Closer
cooperation in these fi elds with dynamic urban regions, which are often the economic
centers of continents, would also benefi t German cities and regions.
228
IV.3 Is everything possible? Technology and information
Online
Technological progress has been one of the most infl uential factors behind social
development in recent decades. New technologies have brought marked changes to
communication, the production and distribution of goods, food production, and medi-
23 Ernst Hillebrand, Too many or too few? Demographic growth and international migration,
Compass 2020, Friedrich-Ebert-Stiftung, Berlin, 2007.

cal treatment, but also to warfare. More than anything else, it is information technology
that has contributed to boosting the development of the world economy, integrating
existing markets and opening up new ones. The Internet also facilitates international
political management, from efforts to combat bird fl u to the organization of the World
Social Forum.
Nor will technological development lose steam in the years to come. More invisible
and personalized, the technologies of the future will be more closely dovetailed with the
various political, social, and private aspects of life. Of particular importance will be the
interplay between three technologies: information technology, already well established,
will become even smaller, faster, cheaper, more user-friendly, and more broadly available,
close to omnipresent; advances in biotechnology will make it possible to better
understand, modify, and control living organisms; and nanotechnology will make it possible
to master microstructures and to develop miniatures that will substantially increase
the capacities of the other two technologies. The greatest potential is assumed to lie in
the combination and integration of different technologies. Medical research, material
sciences, safety engineering, agroindustry, and modern transportation systems are the
most important fi elds that will be infl uenced by the interplay between technologies. And
without a massive use of technology (GrinTech – green integrated technology), it will be
virtually impossible to tackle the most pressing problems facing the world in the years
to come. New methods of water supply and improved fi lter technologies could help to
ensure that clean and affordable water does not become a scarce commodity precisely in
urban agglomerations: intelligent and fully biodegradable materials can pave the way for
waste prevention in place of waste production.
But the further advance of technologization will prove to be ambivalent. The new
technologies of the twenty-fi rst century will not fi nd themselves in the situation of twentieth
century information technology, which did not need to overcome major resistance
in society. The reverse sides of the new technologies are becoming more manifest. We
encounter them, for example, in the form of infringements of the private sphere made
possible by the surveillance possibilities opened up by huge databases; ethically more
complex questions in biotechnology; and uncertain risk assessments and hermetic control
of technologies that pose a massive risk, due to accident or misuse. A number of
these technologies will become powerful political issues, and their adoption and further
development will be accompanied by more social and political controversies than they
have in the past. Another question that will grow in importance is the “reinvention” of
technologies that have become obsolete or too risky.
Real time
It is due not least to advances in information technology that communication and
the media have come to play an increasingly important role in international relations.
The growing lack of transparency characterizing international relations and growing uncertainty
concerning political decision-making have given the media greater infl uence
over political processes. Satellite television and new stations such as Al Jazeera and Abu
Dhabi TV, talk radio stations, but also the rapid growth of the “blogosphere”, have further
boosted the decentralization of the media and information procurement. Today’s
more diverse and broader fl ows of information, which can – despite massive defensive
reactions on the part of authoritarian regimes – render political systems more permeable,
have made it possible for individuals to form truths of their own.
229

At the same time, today’s decentralized access to information and information dissemination
makes it easier for all kinds of political actors to launch campaigns, to persuade
people, to propagate their views, and to organize: the Internet, a medium subject
to very little censorship, is crucial in this connection, and today the spectrum of interventions
it has made possible range from the Internet petition and the virtual “J’accuse” to the
downloadable terrorist video.
Television has in recent times clearly demonstrated the huge infl uence that (staged)
picture worlds may have on our worldviews. In the second Gulf war, real time, live transmissions,
pool journalism, and new military technology set the stage for a strategic occupation
of our screens, a strategy that was supposed to show us a germ-free and victimless
war; this strategy, however, proved impracticable in the third Gulf war thanks to the
decentralization of information and altered attitudes on the part of many in the media.
Richly illustrated information can create a “morality of perception” (Georg Seeßlen) that
calls on us to act, while the opposite “CNN effect” may lead to situations in which world
events, no longer reported on, fi nd little attention – and induce little political action. The
discussion on the “image-defi ning role of the media” and the enlightening, distorting, or
formative role played by the media in international relations shows, fi nally, that public
opinion has become a weighty factor in international politics – and the question of how
and through what media international politics can best be infl uenced is bound to grow
in importance.
Offl ine
Modern communication technologies such as the Internet awakened hopes of a “great
equalizer” that was to be used to transfer knowledge and information throughout the
world. In fact, global inequality has turned out to have another facet: a virtual wall separates
the countries that have at their disposal as much information and communication
technology as they desire from the countries that have limited access to this technology.
While the digital divide fi nds real expression in other categories as well (rural/urban, income,
gender, education, age), the most striking global inequalities are geographic: by far
the greater part of mankind remains cut off from modern information and communication
technologies. Some 90% of Internet users live in the industrialized countries; over half
of the world’s population lacks access to a telephone, while 19 out of 20 have no Internet
access. While the US and Canada (69.7%), followed by Europe (38.9%), have the highest
degree of market penetration (Internet users/population), the Middle East (10%) and Sub-
Saharan Africa (3.6%) have the least. 24 The entire African continent (minus South Africa)
has less Internet traffi c than Manhattan. Asia shows a number of major disparities: while
China, with 137,000,000 users, has the largest and fastest-growing Internet community
and the Tigers and Japan have high degrees of penetration, parts of South Asia and – in
particular – the Central Asian republics (with an average of 2.3%) have largely been left
behind. In Latin America (17.3%) the Cono Sur countries, led by Chile and Argentina, are
better connected than the Andean countries or Central America.
There is reason to believe that in the coming years the development divide between
the “have nets” and the “have nots” will continue to deepen. And the parts of the world
that already have technologies and continue to develop them will do all they can to improve
their connectivity. Some countries in Asia will be better connected, as will parts
230
24 Internet World Stats, www.internetworldstats.com/stats.htm, 26 March 2007.

of Latin America – above all Brazil, where over 20 billion euros has been invested in
telecommunications projects in recent years, while no more than two billion euros has
been invested in the Middle East, South Asia, and Sub-Saharan Africa. 25 The disconnected
world will experience the emergence of islands of information and communication,
where mainly social elites and NGOs will be connected.
Today, the ability to make use of information technology is one of the factors crucial for
prosperity. Viewed in these terms, lack of access is an obstacle to poor nations’ social and
economic development. The key factors needed for the further expansion of modern communication
technologies are – as in the case of many other technologies – not only “hard”
factors, such as the availability of a stable and broad physical infrastructure, market access,
and affordability, but also “softer” factors, such as population education/training levels
(reading skills and linguistic competence) and local acceptance of new technologies.
Home base
Germany is a high-tech country, and much of its economic success and social prosperity
depends on whether and how the country manages to develop, integrate, and market
innovative products and processes. There are good reasons to believe that the markets
of the future will be green. Transportation and mobility technologies, bioplastics, water
and wastewater technologies, and energy effi ciency may serve as examples of these key
fi elds, which are directly relevant in meeting important tasks of the future. These in turn
would include approaches to urbanization processes, the climate issue, or confl icts over
water and other resources. Efforts to position Germany as a “global environmental engineer”
would also open up opportunities for economic development. Apart from efforts to
set the course for Germany’s economic and innovation policies and for the conversion of
the national industry structure, Germany needs above all to be engaged in international
climate and environmental policy.
Today, knowledge ages and is replaced by new knowledge at a faster pace than ever
before in history. Bearing in mind these rapid knowledge and technology cycles, and in
view of demographic developments and the increasingly close linkage between technology
and work, the ways in which knowledge is organized and diffused and approaches
designed to adapt (vocational) careers will become important tasks for the future.
The path to the much-cited knowledge society and the use of new technologies is
likely to lead to a number of confl icts, at both national and global level: distribution confl
icts between different factions of industry over innovations, confl icts between ethical
principles and competition-related interests, between the desire for open markets and
the need for protection of innovations, or between the right to privacy and the need for
control mechanisms. Society’s acceptance of new technologies is increasingly becoming
a precondition for fundamental innovation. Careful risk assessment and a transparent
public debate on new technologies are indispensable in this connection.
This would extend in particular to “preventive control” of sensitive technologies designed
to set social limits to what is technologically possible. Such limits might consist
of a ban on development or “reinvention” of certain technologies. In the countries of the
South, development policy must help to “leapfrog” environmentally harmful technology
stages.
25 UNESCO, World Report: Towards Knowledge Societies, Paris, 2005; Social Watch, Report
2006: Impossible Architecture, Paris, 2006.
231

The fact that many Southern countries have limited access to information and technology
is a crucial factor obstructing their development. This is why international engagement
must work to ensure that access to technology becomes possible and affordable
(for example, with the aid of a massive diffusion of the 100-dollar laptop developed
by members of MIT’s Media Lab), that illiteracy is reduced, and that education/training is
improved. But technology transfer must be embedded in a knowledge transfer that does
justice to the social and cultural aspects of technology. One contribution here could be
improved international cooperation in education/training (for example, via universities
and companies) aimed at boosting the brain gain for developing countries, and other efforts
aimed towards at least containing the brain drain to the developed countries (see
Section 4.2).
232
IV.4 Risky times? Confl ict and security
Collective security and collective defense – guaranteed by the UN and NATO – are
the basic conceptions on which Germany security has been based in the postwar era.
Even though this may at times have been lacking in practical coherence, it did constitute
the stable framework in which Germany, mainly a “security recipient” at the seam of
global confl ict, was embedded.
As far as both the actors and the threats and risks involved were concerned, however,
the end of bloc confrontation gave rise to an obscurity as regards security policy for which
no pattern of action had yet been developed. After some initial hopes in the 1990s, the
UN proved unable to assume the role of stable and effi cient backbone of a robust world
peace order; NATO is in the midst of a transformation process with an uncertain outcome;
new, regional security projects could turn out to be important structural elements
of a new world order, but they remain highly fragile and limited in reach. Unmistakable,
however, is the renaissance of great power politics, the return of war as a political instrument,
and a growing inclination toward self-dispensation from collective norms, all of
which has led to increasing damage to the multilateral world order since the mid-1990s.
One of the most important tasks facing international politics is still to fi nd a viable architecture
for collective security. But this will succeed only if general agreement is reached
on the nature of the crises and risks presently besetting the international system.
Today’s risks are characterized by their close interlinkage and interdependence, a
rapid regionalization of local confl icts, asymmetrical constellations, the important role
played by the media, and a heightened risk perception in the developed countries. The
“list of global threats” compiled in the most recent report on UN reform (In Larger Freedom:
Towards Development, Security and Human Rights for All) covers the most important
security risks and is largely consistent with the lists of problems assembled by national
governments and regional organizations: economic and social threats, including poverty,
disease, and environmental degradation; confl icts between and within states, including
civil wars and genocide; nuclear, radiological, chemical, and biological weapons; terrorism
and transnational crime.
This situation has led the countries of the North to focus more and more on whether
and to what extent confl icts and problems besetting some regions and countries of the
South could also constitute a threat to their own security and economies. While the concrete
threats facing Germany in particular have decreased since 1990, a number of (development-related)
political problems have now come to be defi ned as relevant to security,

and their implications for the countries of the North are not yet foreseeable. More complex
and diffuse, and so more unpredictable than the East–West confl ict this constellation
contains considerable fuel for confl ict and is leading to a sense of uncertainty in the
countries of the North. Whose security are we talking about, therefore? Who is supposed
to be protected from what dangers, and how? We must bear these questions in mind in
discussing security risks today.
Looking at the great number of security challenges facing the world today, Western
security circles regard the proliferation of weapons of mass destruction as potentially the
greatest threat to global security, while seeing terrorism as the most immediate threat
and identifying regional confl icts sparked by internal tensions as the type of confl ict that
will dominate in the years to come.
Terrorism
Since September 11, 2001, and other attacks on all continents (except for Latin America),
transnational terrorism and the fi ght against it have become the dominant issue in
international relations. In Western societies such terrorism is perceived as a substantial
factor undermining security, although there is still some controversy over how best to
deal with the threat.
A good number of factors have contributed to the emergence of this form of terrorism.
These include a motivating ideology that serves to bridge the differences between
terrorist actors, merging numerous regional specifi c confl icts to form what appears to be
an overall strategy, a seemingly unshakable hegemonic power that serves as a “federator”
(“the Great Satan”), powerful social tensions that generate violence-prone environments,
and a number of emblematic organizations. At the same time, the structures of terrorism
appear to respond very fl exibly to change: the pressure generated by the “war on terror”
has served to loosen the links holding the – increasingly faceless – terrorist networks
together, while al Qaida itself has increasingly assumed the role of ideological and social
leader. One fact particularly disquieting for Western societies is that Islamist terrorism
has emerged not only in what have generally come to be termed failed states, which are
certainly well suited for recruitment and training, but in Western societies themselves.
Indiscriminate murder and destruction of symbols of a “Western order” are part and
parcel of a terrorist communication strategy that aims, above and beyond the targets and
victims of its attacks, principally at achieving psychological effects and is designed to
convey two messages: fi rst, terrorists seek to convince potential followers that attacks on
the overly powerful West, its representatives, and its culture are both possible and effective
and that even in this asymmetrical confl ict they are entirely capable of developing
political power; second, the stage management of terror and the publicity accompanying
individual acts exert their impact within – often democratic – societies, causing insecurity,
fear, and intimidation. “The guerillero occupies the land, the terrorist takes possession
of our thinking” (Heribert Prantl). It is precisely mass access to modern means
of communication such as the Internet that has opened new avenues for terrorism to
multiply its propaganda.
To cite an example, it is mainly terrorism that has been responsible for the fact that the
(actual or perceived) need for more security has assumed such importance in the world’s
societies in recent years. Some countries have reacted externally with military power, but
nearly all countries have responded internally by massively expanding their security strategies
– with war between nations following on the heels of privatized violence, and with a
233

sense of insecurity in society engendering what might be termed “security hysteria”. In the
past, military actions have not contributed to boosting security and containing terrorism,
however; on the contrary, the military option has weakened the political strategies devised
to counter terror, leading to further polarization and seemingly confi rming the thesis of
the clash of civilizations. By infringing international law, turning a blind eye to human
rights, or forging alliances with authoritarian states for purely tactical reasons a kind of
“mutual assimilation” takes place that further undermines the legitimacy of Western countries’
antiterrorism efforts. The nightmare scenario in Iraq is the terrorist’s dream scenario:
“The West” wholly relinquishing its most important weapon, namely its civil, economic,
and social attractiveness. If we look hard at the factors that led to its rise and the strategy
currently deployed to combat it, we must conclude that it is unlikely that transnational terrorism
will be completely overcome in the near future. But if the war on terror becomes a
permanent state of affairs, it would have catastrophic results for (democratic) societies and
a cooperative international order. No sustainable success in the struggle against terrorism
is likely unless every effort is made to avoid using means structurally similar to those used
by terrorism itself. Concretely, this means that the “war on terror” should fi rst and foremost
addressed through politics and anticrime measures, not by military means.
Disarmament and proliferation
All Western security doctrines regard the proliferation of weapons of mass destruction
as one of the most important threats to global security. Issues of disarmament and
arms control agreements have not ranked high on the agenda in recent years, however.
The opportunity presented when the East–West confl ict came to an end to accelerate the
reduction of arms stockpiles, to establish a new disarmament and arms control regime,
and so possibly to prevent the emergence of new nuclear powers, has not been taken.
And despite the undisputed successes of, for example, a regime such as the Nonproliferation
Treaty, the existing regimes are in danger and are coming under growing pressure
from various quarters.
At present, for instance, we can observe a clear-cut trend toward the further proliferation
and modernization of nuclear weapons, a development that could trigger a “spiral
of fear”. Pakistan, India, and (presumably) North Korea have already become nuclear
powers, and Israel is also reported to be in possession of nuclear warheads. Iran is working
full speed ahead on a nuclear program that, according to the IAEA’s assessment, is
also designed for military use. It is above all in sensitive regions such as East Asia and
the Middle East that some other countries (for example, Japan, Egypt, and Saudi Arabia)
might come to regard the acquisition of nuclear weapons as a viable security option. Enlargement
of the circle of nuclear states would not only make the work of arms control
far more diffi cult, but it would also – as the examples of Pakistan and North Korea show
– increase the risk of proliferation between countries. What we see is a growing risk
that a “nuclear supermarket” may develop that could, potentially, facilitate the access of
terrorist actors to weapons-grade material. The old nuclear states in turn are currently
modernizing their arsenals, demonstrating their intention to continue defending their
privileged interests and their unwillingness to rid themselves of their nuclear weapons.
At the same time, these countries are distancing themselves from the exclusively “political”
role that nuclear weapons played in the past by developing tactical nuclear weapons
designed explicitly for use (“mini-nukes”).
234

While there is no mistaking an incipient nuclear arms spiral that could unleash a
dangerous dynamic in the coming years, we can at the same time note a decline in the
number of countries producing chemical or biological weapons – a development due not
least to the Biological and Toxin Weapons Convention. The focus now is more on non-state
actors. While at present nuclear weapons are too costly to build without the aid of state
structures (unless of course relevant groups gain the support of certain states), the rapid
further development and dissemination of biotech research has given rise to a real danger
that terrorists could acquire biological weapons, which are easier to build or procure.
One of the central questions will be how successful regimes can best be modifi ed and
adapted with a view to effectively preventing non-state actors from building or acquiring
such weapons.
At present there are no binding and effi cient regimes in place to control small arms,
the most devastating type of weapon in use in ongoing confl icts: today some 90% of all
victims of confl ict are killed by small arms, some 650 million such weapons are in circulation,
half of them privately owned, and a good share of them – facilitated by organized
crime 26 – wandering from crisis region to crisis region. Cheap, easy to transport and
conceal, and simple to operate, small arms are the “perfect” weapon for the “new wars”
(Mary Kaldor). The 2001 UN Programme of Action to Prevent, Combat and Eradicate the Illicit
Trade in Small Arms and Light Weapons in All Its Aspects has been the point of departure
for numerous initiatives, most of them launched by civil society organizations. While
the program contains a number of recommendations for action (such as identifi cation
and destruction of surplus publicly owned weapons) the control regimes continue to be
weak. It is above all the resistance of the major producers (the US and Russia) that has so
far managed to prevent the inclusion of privately owned weapons, the setting of binding
standards – that is, that give due consideration to the confl ict risk in recipient countries
– for weapons transfers, and the adoption of rules barring non-state actors as recipients.
Despite EU pressure, the Small Arms Review Conference held as a follow-up on the Programme
of Action 2006 was unable to come up with any new agreements. In view of the
situation of violence in many countries, this void represents a serious problem for crisis
prevention.
Fragile states – fragile regions
According to estimates, today some two billion people live in fragile states, although it
must be said that the range of states included here extends from weak states with defi cits
in individual areas to countries embroiled in civil war and collapsed states that have lost
control over their own territory. The process of state failure as a rule takes a fair while to
reach the stage of complete collapse. Fragile states usually have serious defi cits in maintaining
basic government functions, including the enforcement of the state monopoly on
the legitimate use of force, lawmaking, taxation, or social services. Many factors play a
role when a country develops into a failed state, and the impacts of these factors may differ
considerably from one country to another. Two can be traced like a red thread through
all the “failure stories”, however: social inequality and a state that has fallen into discredit
are foremost among the causes of instability. Under the crumbling shell of the nation-
26 Richard Mörbel/Sönke Schmidt, Prevention and suppression of organised crime: future action
perspectives from a German and a European angle, Compass 2020, Friedrich-Ebert-Stiftung,
Berlin, 2007.
235

state, we fi nd structures that, far from serving to create stability, operate as causes for
confl ict. Autocratic rule and neopatrimonial political systems, often accompanied by systematic
corruption, are factors that discredit state institutions. This lack of robust statehood
and of elites oriented to the public good in turn serves to strengthen other substate
structures: while “civic” loyalty tends to weaken in “shadow states”, ethnic and religious
ties tend to strengthen as clans and local autocrats begin to exercise social control.
Transformation of the form of belligerent confl ict is usually traced back to the “crisis
of statehood”. The dissolution of the state monopoly on the legitimate use of force, a
weak institutional landscape, and a lack of legitimacy in the eyes of society are generally
seen as the most important preconditions for or as concomitants of an escalation of violent
confl ict. As Herbert Münkler noted, in many regions the “state-building wars” familiar
from the era of decolonization are now being superseded by “wars of state collapse”.
The most manifest expression of such regional confl ict formations may be seen in the socalled
“new wars” (Mary Kaldor). These confl icts, 90% of which are fought in regions of
the South, are marked by a large degree of diffusion, irregularity, and asymmetry. All of
the demarcation lines drawn – mostly based on Clausewitz’s ideas – to characterize war
in the classic sense (for example, between government, army, and population, between
combatants and civilians, national and foreign territory, between politics and the economy)
have tended to become blurred. These confl icts do not center primarily on efforts to
capture government power, but are dominated by other objectives such as identity politics
or appropriation of (local) sources of wealth, energy resources, and so on. The war
economies thus created serve to fund hostilities, although they themselves may become
a source of confl ict. Here the only function of statehood seems to be to block the access
of regional warlords to the world market, assuming they are able to turn world market access
to account, for example, in the form of diamonds, opiates, timber, or human beings.
One effect of the informalization of such confl icts is that they are seldom terminated by
agreements between the confl icting parties, tending more simply to weaken or to run out
of steam over the course of time – although they may also fl are up again at any time. Half
the pacifi ed countries of this kind experience, on average, the outbreak of a new confl ict
within less than fi ve years. 27 One especially problematic phase tends to occur roughly
three years after a peace accord has been signed, when the attention of world public
opinion and the international donors have turned to other, more pressing crisis regions;
that is, when a certain surface stability has been created, but without remedying the root
causes of confl ict, which are often social and economic in nature. Here the particular
challenge for the United Nations is to create – despite a lack of international public attention
– an awareness of a given endangered region and to organize a continuous fl ow
of fi nancial and manpower aid that may contribute, post-confl ict, to stimulating a certain
measure of economic growth.
Many regions, some even in the immediate vicinity of the European Union, have experienced
the emergence of complex confl ict formations that are for the most part bound
up less with world-political developments than with relations within a given region itself.
These “security regions” are typically marked by a number of interlinked security-relevant
factors, including institutional weaknesses in the countries concerned, informal
economies, migration, border-crossing guerilla activities, smuggling activities, a massive
27 David Harland, Die Aufmerksamkeit für Konfl ikte hält nicht lange an, Interview mit dem
Leiter der “Best Practices”-Einheit in der Hauptabteilung der Vereinten Nationen, in: Aus Politik
und Zeitgeschichte, No. 41, 2005.
236

proliferation of small arms, environmental disasters, or excessive resource exploitation.
Fragile states have long been seen as a security problem of regional scope. Yugoslavia,
Liberia, Afghanistan, Haiti, Cambodia, and Somalia – some of which have already experienced
at least one intervention – are the best-known examples. But it was 9/11 and
the links between transnational terrorism and failed states serving as a “safe haven” for
terrorists that fi nally thrust the problem into the center of the security thinking of the EU
and the US. To put it in the words of the 2002 US National Security Strategy, “America
is now threatened less by conquering states than we are by failing ones”. The threat
posed by the power of a hostile state is now being superseded by the threat posed by the
powerlessness of an (ex)state. Thus far, the responses to the challenge do not seem to
have born much fruit, however. In the coming years regions such as Central Africa or the
triangle of Afghanistan, Iran, and Turkmenistan could slip further into a cycle of violence
and instability. The fi nal outcome of both the protectorates created by “liberal interventionism”
in the 1990s and the military approach to combating terrorism has proven quite
meager. Sustainable peacebuilding in fragile states – one of the main tasks, for example,
of the newly established UN Peacebuilding Commission – is bound to become one of the
key challenges facing security policy in the years to come. The task at hand gives us only
a vague idea of the dimensions of this challenge: the Peacebuilding Commission will be
expected to moderate between possible security measures, different donor countries,
troop-providing countries, and the international fi nancial regimes.
Extension of the combat zone?
None of the challenges formulated here can be met by purely military means, and the
military component plays the smallest role in each of the relevant individual problems.
The approaches with the best chances of success in the medium term include diplomacy,
cooperation, and global regimes in the case of disarmament; police and intelligence services,
awareness-building and social policy in the case of terrorism; and preventive confl
ict management and sustainable state-building in the case of regional confl ict.
This also appears to be the consensus in German and European policy. Both the European
Security Strategy and the German “White Paper 2006 on German Security Policy
and the Future of the Bundeswehr” are predicated on a broad concept of security that
calls chiefl y for a set of preventive instruments. The “comprehensive security strategy” is
thus based on a broad range of non-military instruments and methods, and is designed
to provide a joint and coherent approach involving all the different actors engaged in
Germany’s security policy (“networked security”). The idea of a multidimensional approach
has found its most prominent expression in the offi cial German “Action Plan
Civilian Crisis Prevention, Confl ict Resolution and Post-Confl ict Peace-Building”, which
was adopted in 2004. The main problem involved in crisis prevention is the need to create
an early-warning system that makes use of international decision-making processes and
is responsible for the whole process, from the fi rst early-warning signal to the formulation
and implementation of a prevention strategy. One particularly problematic aspect
here is the gap between early warning and preventive action; its causes may be sought,
on the one hand, in the at times somewhat impractical analyses formulated by “early
warners” and, on the other, in the lack of political will on the part of decision-makers.
But the actual practice of Germany’s security policy stands in contrast to its constantly
reformulated basic concerns: above and beyond cooperation in individual cases,
an overall conception has yet to be worked out for networked security. The Action Plan
237

has had little more than a symbolic effect, and the idea of prevention has not found concrete
expression in either the funding provided for the relevant instruments or in a strategy.
The existence of this strategic gap entails the danger that, given these conditions,
an extended security concept can lead only to an extended defense concept that blurs
the boundaries of situations in which defense becomes necessary, expanding the Bundeswehr’s
tasks (at home and abroad), but without strengthening the civil instruments
involved. Even today, when the Bundeswehr is sent on missions abroad, it is assigned, for
example, police tasks, namely functions for which it is actually not responsible and that
constitute a growing burden on it, in both personnel and funding terms. But a securitypolicy
alternative designed to actively represent European interests abroad would require
timely efforts to enlarge the civil components involved.
At the United Nations level, the concept of the “Responsibility to Protect” (R2P) was
formulated in response both to alarming developments in some crisis regions and to the
question of the conditions under which external actors may legitimately intervene to
protect the civilian population: if a state is unwilling or unable to protect the population
against genocide, war crimes, ethnic cleansing, and crimes against humanity, the responsibility
to protect devolves upon the other members of the international community. And
in view of the fact that (military) intervention is seen as the means of last resort to put an
end to a confl ict, early warning has an important role in this connection. At the UN level,
the appointment of Francis Deng by Secretary-General Ban Ki Moon in May 2007 to the
new position of Special Advisor for the Prevention of Genocide has upgraded this offi ce,
giving the R2P concept real relevance (as opposed to the rhetorical relevance it had previously).
While the German government’s Action Plan also contains a commitment to the
R2P concept, this has yet to be fl eshed out in concrete, substantive policy terms.
Another question that needs to be addressed in connection with this still unresolved
task is how, in the years ahead, German politics will deal with missions abroad involving
German soldiers. Despite the over 10,000 German solders presently on missions in
crisis regions throughout the world, a fundamental political and social debate on the aim
and object of German missions abroad has been slow to develop; there is a tendency in
Germany to “smuggle” 28 such missions past the eyes of the citizenry by seeking to minimize
the scope of the risks involved, playing down their military character, and often
not clearly specifying their aims and perspectives. The fact that hardly any public notice
has been taken of the projected extension of the Afghanistan mandate is perceived with
growing unease by the Bundeswehr. Instead of seeking to “conceal” military missions,
it would be important to increase efforts to cast such missions in a political light and to
engage in a public discussion on the decision-making process.
In this connection more and more calls have been heard for Germany to use a list of
concrete criteria to formulate “more clearly” the point of a given mission and the mission
area concerned. A debate of this kind could certainly contribute to improving the
transparency of decisions and provide some points of orientation on missions abroad,
but the result should not be a simple “checklist” with a bottom line indicating clear-cut
pros and cons. In the years to come individual missions will need to be decided on a
case-by-case basis, and here the German Parliament should take a more assertive stance
than it has in the past. Nor should the discussion be keyed to “national interests”, which
have been postulated again and again, but for the most part without a clear defi nition:
238
28 Ulrich Speck, Kosmoblog, Die Zeit, http://blog.zeit.de/kosmoblog/?cat=26, 17 July 2007.

while these interests may be bound up with the need to secure natural resources, they
should be clearly oriented to the protection needs of the affected populations and based
on rules that have been jointly agreed on. The fi ve criteria used to examine the use of
military means (seriousness of the threat, purpose of the intervention, ultimate means,
appropriateness, consequences – they also went into the making of the fi nal document
of the 2005 UN Summit) could prove useful in better structuring the debate. But here too
it is important to bear in mind that those who ask for criteria for missions abroad should
start out by asking about crisis prevention. And as far as the White Paper 2006 is concerned,
it would be essential to clarify the concrete structures in which an international
security engagement is embedded, mindful of the fact that this may, in extreme cases,
mean military intervention. These missions should be integrated in a system of collective
peacekeeping in the UN framework, and the contributions of regional structures must be
closely dovetailed and coordinated with the corresponding UN structures.
Looking at the various fi elds of foreign policy from the German perspective, the
greatest change thus far has undoubtedly taken place in security policy. But strategic
debate on the consequences, instruments, and aims of German security policy has made
little headway in recent years. The White Paper 2006 did little to change this situation. A
commission of inquiry on “networked security”, including representatives of politics and
civil society, the Bundeswehr, security experts, and partners from abroad, could provide
an impetus for a broader debate in society. The commission could be asked to conclude
by issuing a brief, concisely formulated strategy paper – one conceived not as the end of
the debate but as the point of departure for further debates. Security policy in particular
must maintain a certain measure of fl exibility in order to be able to respond appropriately
to crisis situations, although it must at the same time be built on a foundation of
predictability and reliability.
In Germany there is a fundamental consensus that prevention – a reasonable, effective,
and lower-cost approach to managing confl icts with major escalation potential
– must be given precedence over intervention, an after-the-fact response to war, genocide,
or state failure. This must be given a clearer expression than it has in the past in
terms of how the existing instruments are embedded in a security strategy, as well as in
the expansion of funding and the coordination of the strategy. 29 It will be possible here to
fall back on the preliminary work carried out by several international NGOs active in the
fi eld of early warning/early diagnosis. It would therefore make sense to build consistently
on the fi rst steps taken on the road to interministerial cooperation, for example, within
the framework of the Action Plan. First studies on the Action Plan three years after it was
adopted have come to the conclusion that no forward-looking developments have yet
become visible – either in efforts to systematically network existing early-warning instruments
or in approaches to collating crisis-relevant data with non-state institutions. 30
Networked security calls for networked governance. With a view, among other things,
to not overextending its capacities, Germany should take advantage of the parallel development
of the European Security and Defence Policy (ESDP) and the process of coordi-
29 Michèle Auga, Crises and wars in times of globalization: How German crisis prevention and
peace building could help, Compass 2020, Fried-rich-Ebert-Stiftung, Berlin, 2007.
30 Christoph Weller, Zivile Krisenprävention und Konfl iktbearbeitung: Politische Herausforderungen
und der Aktionsplan der Bundesregierung, http://inef.uni-due.de/page/documents/
Weller_-_Zivile_Krisenpraevention.pdf, 16 Oct. 2007.
239

nation with the other member states to concentrate especially on those areas in which it
has particular expertise, for example, promotion of democracy. 31
In the fi elds of disarmament and arms control policy Germany has in the past earned
international recognition that should be turned to account in the years to come. A strict
arms export control policy, a multilateral, preventive arms control strategy, and efforts
to preserve the nonproliferation regime would be among the central points of departure
here. This would also mean taking a clear position against the modernization of nuclear
arsenals and for efforts to swiftly reduce stockpiles – also in Germany. 32
Since one of the aims of terrorism is to manipulate political thinking and action in
target countries, the domestic approach selected for dealing with the threat is of crucial
importance for thwarting terror. Without exception, the balance between security and
freedom will ultimately be based on consensus in society. Thus far most countries have
responded to the threat by restricting civil rights and liberties, adopting more refi ned
methods of data collection and surveillance, and curtailing constitutional rights in favor
of preventive and seemingly tougher and more effective emergency laws. Instead of continuing
to overburden and fetishize the concept of security, it would be far more reasonable
to develop a kind of political countercommunication that places its trust precisely in
civil liberties and provides information and education as a means of helping the societies
concerned to develop a civil and pragmatic approach to dealing with the threat.
240
IV.5 The last oil change?
While for years it could be taken for granted that energy would simply fl ow from the
power socket, the water heater, and the furnace, in the winter of 2006 the current stock
of uncertainties was supplemented by the fear that Germans and other Europeans might
soon be sitting in unheated houses, staring into cold cooking pots if Russia turned off the
gas supply. More than almost any other policy fi eld, energy has in recent months been
thrust into the consciousness of politics and the general public. While energy policy had
vanished from the political agenda since the two 1970s oil crises, high oil prices, the
climate debate, rising demand for energy in the emerging markets, and the political instrumentalization
of energy resources have now sparked a debate on energy security. The
energy issue is closely bound up with other core foreign-policy issues: without a secure,
smooth, and affordable supply of energy, economic development is unthinkable – access
to energy is an elementary component of global equity; successes in climate policy
are contingent, among other things, on energy effi ciency, availability, and consumption;
renewable energies can be developed only on the basis of technological innovation; and,
fi nally, the political stability of importing and exporting regions alike will depend in key
ways on how energy policy is formulated in the future.
Scarce resources
Worldwide demand for energy is expected to rise by some 50% by 2030, and 81% of
this demand will continue to be met by fossil fuels. Primarily on account of the transportation
sector, oil (33%) will remain the most important energy resource, and by 2020
31 Stefanie Flechtner, On a new mission: the foreign mission of the Bundeswehr and German
security policy, Compass 2020, Friedrich-Ebert-Stiftung, Berlin, 2007.
32 Hans J. Gießmann, Farewell to disarmament? Points of orientation in Germany‘s arms control
policy, Compass 2020, Friedrich-Ebert-Stiftung, Berlin, 2007.

natural gas will have toppled coal from second place. Forecasts indicate that the contribution
of nuclear energy will decline from 6.5% today to around 5%. Renewable energies
will account for 8%, with hydropower contributing the largest share; biomass will continue
to grow in importance, especially for the fuel sector; and solar and wind energy are
expected to post the highest growth rates. Wood, fi nally, continues to satisfy some 6% of
worldwide demand for energy. But these fi gures conceal some different, in part confl icting,
regional trends. The developing and emerging countries, above all China and India,
will account for over two thirds of rising demand. By 2020, however, consumption of
fossil energies – except for coal – and use of nuclear power will be appreciably higher in
the developed than in the developing and emerging countries. While the share of nuclear
energy will increase in Asia, in Europe it is likely to decline on account of public reservations
concerning the risks it poses. But the highly heterogeneous character of European
nuclear strategies and the link with the climate debate could also lead to a situation in
which nuclear energy experiences a renaissance by 2020. The most recent medium-term
energy concepts formulated by the US and the EU indicate that agrofuels will be able to
replace a certain share of fossil energy resources, above all in the transportation sectors
of the developed countries, but also in Brazil and India. While capacities for the use of
water power are practically exhausted in the developed countries, China, but also India
and Latin America are likely to expand their capacities massively.
Although there has been some media talk of the possibility of “oil wars”, the macropicture
anticipated for the medium term is not solely gloomy. Europe is unlikely to experience
any protracted bottlenecks in its energy supply by 2020 – unless unanticipated,
massive energy-related confl icts should develop. According to conservative estimates,
the world’s proven oil reserves will last for some 50 years. The much-discussed peak,
however – that is, the point at which oil production begins to decline rapidly – is anticipated
somewhere between 2015 and 2025. In other words, time is growing short to
embark on a new energy policy course, and there is no disputing the fact that energy
resources are increasingly scarce.
The era of cheap oil likewise appears to be over, and the markets are likely to remain
nervous. Growing demand, possible cuts in oil output due to lack of investment, but also
to fi nancial speculation in the oil market, are likely to keep prices high and volatile. In
the coming years this – together with access barriers to regional energy systems – could
lead to serious supply problems for a number of developing countries, for which oil is a
particularly important cost factor. Twenty-fi ve of the world’s poorest countries are forced
to import 100% of the oil they consume.
The combination of rising demand and declining oil production in the most important
oil-consuming regions is leading to a growing dependence on energy imports. This
development puts the emerging countries and the developing countries in the same boat,
and it is bound to give rise to major political problems, on top of the technical challenges
involved (for example, transportation). In the coming two decades Europe will have to
import some 90% of its oil (most of it from Saudi Arabia, Iran, Iraq, Algeria, Russia, and
Norway) and 80% of its gas (from Russia, Norway, and Algeria, as well as from Qatar in
the future). The US, which, unlike the other main importers, has appreciable oil and gas
reserves of its own, will be forced to use imports to meet some 20% of its gas needs and
66% of its oil needs. But the US already has a highly diversifi ed oil import structure, with
its imports breaking down as follows: 33% from Latin America, 23% from the Middle
East, 18% from Africa, and 16% from Canada. Coal, which covers roughly two thirds of
241

China’s energy needs, will continue to play the main role in the country’s energy mix, although
in the coming years the share of oil (and natural gas) will continue to rise because
of China’s growing transportation volume, expansion of its oil-processing industries,
and environment-related restrictions on the use of coal. Even today China is the world’s
second largest oil consumer, after the US. China, which 15 years ago could satisfy its demand
for oil from its own resources, will be forced to import some 80% by 2030. By 2020
India, which presently imports two thirds of its oil from Saudi Arabia, Kuwait, Iran, and
Nigeria, will be forced to import roughly 90%. 33
Since many countries will be virtually unable to compensate for these leaps in demand
by utilizing domestic resources or improving the effi ciency of their energy production and
consumption, import structure diversifi cation would be one possibility for them to at least
mitigate their dependence on imported energy resources. But the geographic concentration
of the most important fossil energies – oil and gas – sets limits to any such strategy.
If, until the 1950s, some two thirds of the world’s oil resources were produced in the industrialized
countries of the North, including the US, today the focus of production has
shifted to the countries of the South. The relative weight of the Middle East, which holds
62% of the world’s proven conventional oil reserves, will continue to grow in the years to
come, the reason being that the reserves in most other producing regions are dwindling
and production is growing increasingly costly. Roughly the same can be said of natural gas.
Europe’s dependence on imports from Russia and Algeria will continue to increase; even
today these account for 40% of Europe’s gas imports. This growing concentration not only
heightens the risk that a total breakdown of energy production and supply due to political
instabilities, attacks on refi neries, or environmental disasters could prove impossible
to compensate for in the short term, but also makes the importing countries increasingly
prone to political extortion. Compared with the US, Europe has the advantage of being
very favorably located for imports from various regions of the world, since all of the world’s
important producing regions are close to it in geographic terms. In particular, it would be
possible to lay pipelines linking Europe to 80% of the world’s major deposits of natural gas,
the most important energy source over the years to come – and this is a crucial strategic
advantage. But while there are already two Russian pipelines to Germany, and Algeria is
supplying southern Europe with natural gas, Europe at present has virtually no gas pipelines
to the region with the world’s largest reserves – the Middle East and the adjoining
Caspian region – that do not lead through Russian territory. Here diversifi cation would
presuppose huge investments in infrastructure, which is very expensive in the case of gas,
as well as long-term agreements, since such investments pay off only in 20 to 30 years time.
At the same time, Europe is also particularly vulnerable since the supply sources it needs
to meet its energy needs are increasingly located in countries that are unstable in political,
economic, and social terms. The “arc of crisis” so important for Europe’s energy supply
contains some of the world most notorious trouble spots, nearly all of whose countries are
listed in the Failed States Index.
“How do we get our oil from their sand?” – Energy strategies
Today the individual actors concerned associate quite different approaches with the
terms “energy security” and “foreign energy policy”. In the years ahead the key question
33 Jochen Steinhilber, China – A new actor in the Middle East and North Africa Region? Dialogue
on Globalization, Friedrich-Ebert-Stiftung, Berlin, 2006.
242

will be whether, with this macropicture in mind, we are entering a phase of confrontation
or cooperation; whether energy policy is regarded as a zero-sum game in which there may
be losers and winners; or whether efforts are undertaken to develop and acknowledge multilateral
governance instruments that ultimately do justice to the issue of energy interdependence.
The approaches favored thus far seem to indicate that importers and exporters
alike are again showing an increasing tendency to adopt nationalistic strategies that could
place substantial obstacles in the way of attempts to come up with cooperative solutions.
True, the most important fossil energies continue to be traded freely; and in recent years
the energy markets have been able to meet import needs and to avoid any major production
stoppages – like those recently caused by the strike in Venezuela, the war in Iraq, and
hurricanes in the Gulf of Mexico. But while, thanks to the huge long-term infrastructure
investments made in recent years, the world gas market is in any case based largely on bilateral
relations, the world oil market is moving further and further away from what would
be termed a functioning competitive market. Already in the past, energy markets were
anything but perfect markets; indeed, they were shot through, on both the demand and the
supply side, with strong oligopolistic and monopolistic structures.
No other market – with the exception of the arms market – is subject to comparable
government infl uence. The market was long dominated by the big Western energy
corporations. Efforts should be undertaken – from a position of strength – to guarantee
security of supply by further liberalizing the market, that is, by ensuring that access is as
free as possible and by promoting direct investment. But for the future there is good reason
to fear that a further concentration of production, an intrusion of geopolitics into the
energy market, and a renationalization of natural resources will work more to augment
the defects of energy markets and further strengthen neomercantilist tendencies.
In recent years the governments of some important producing countries have increasingly
intervened in the energy sector, and this has often involved the expropriation of
foreign oil corporations and/or crowding them out of the market. According to estimates,
today some 77% of all proven gas and oil reserves are controlled by state-owned or -oriented
corporations. While some state-owned corporations operate on market principles,
others – kept on a short leash – sometime use energy resources as a “currency of power”
(Frank-Walter Steinmeier) in international affairs. Russia’s gas policy vis-à-vis its neighbors,
Venezuela’s oil-fi nanced “Bolivarian Project”, China’s protection of the Sudanese
government in the UN Security Council, and Iran’s open threats to use its energy exports
as a weapon are eloquent examples. Recently Venezuela called for the creation of a “gas
OPEC”, and Iran and Algeria have already expressed their interest. But these developments
also give rise to energy problems in the narrower sense: stringent restrictions on
investment and exclusion of Western companies could lead to a growing undercapitalization
of energy production, obstruct the exchange of sensitive technologies, and further
intensify the general mood of nervousness in the markets. The IEA estimates that Russia
alone will have to invest 17 billion dollars a year to satisfy the demand for Russian gas
and oil in the coming years.
The importing countries have thus far not looked to cooperative approaches to safeguard
their energy needs either, preferring in most cases to pursue national energy strategies.
The US energy security policy focuses on strengthening national energy autonomy
and reducing dependencies – on both unstable producing regions and energy imports in
general. In the years ahead the US plans to cut imports from the Middle East by some
75%, focusing instead on African and Latin American oil resources, while at the same time
243

massively expanding the development and use of “green energy”. Europe, on the other
hand, plans to achieve energy security by creating a highly diverse and dense network of
dependencies between producers, importers, and transit countries. With a view to meeting
the energy challenges of the future, the EU member states have also reached consensus on
a future approach geared to a target triangle consisting of security of supply, competitiveness,
and environmental compatibility; its most important strategies include, apart from
import structure diversifi cation, efforts to boost energy effi ciency and to develop new technologies.
The main idea is to continue, in this framework, to foster and expand strategic
partnerships with producing countries, to develop cooperation with the emerging countries,
above all on alternative energies, and to work for a binding multilateral framework
for international energy relations. While the EU countries are generally agreed that energy
policy must be viewed more as a Community task, the organization of Europe’s internal
energy market and Europe’s external energy relations will make it very diffi cult to translate
this understanding into a concrete policy. The reason is that the energy situations,
energy mixes, and energy strategies of the member states are too divergent, and no common
responses have yet been found concerning either the future role of nuclear energy,
the relationship between market and state in the energy sector, or the further integration
of European power grids. The most serious problem facing Europe’s external energy policy
is that the EU has not been speaking with one voice with Russia, and Moscow is taking
advantage of this cacophony to further bilateralize its energy relations.
Latecomers to the highly competitive energy markets, such as China and India, which
are not integrated into the long dominant and tightly knit market structures, have in
recent years sought to use aggressive fl anking political measures to realize their energy
strategies, even tapping more risky and marginal oil resources – not least in some of the
globe’s darker niches.
China in particular – mindful of the key role played by energy security in its development
model – has thus far focused less on the Western-dominated energy markets than
on supply agreements concluded on a bilateral basis, for example, with Saudi Arabia,
Iran, or Oman. Beijing is seeking to strengthen the hand of its own state-run energy corporations
by having them participate directly in the development of oil and gas fi elds, as
well as in oil production, mainly in Africa. In Sudan in particular, China’s opportunistic
oil strategy has led to results that come close to its ideal of the exclusive oil relationship.
Sudan’s “pariah” situation and the absence there of Western corporations have induced
China to slip into the role of Sudan’s most important oil producer, exporter, and importer.
In Europe’s view, the problems involved in engagement with the emerging countries
have to do less with security-of-supply problems than with the economic and political
effects that such strategies may entail. At least as far as the situations in Sudan and Iran
are concerned, China’s oil interests have put obstacles in the way of a debate in the UN
Security Council – and at the same time have made it more diffi cult to formulate cooperative
solutions for the energy sector.
The efforts undertaken thus far to come up with an international energy policy have
been insignifi cant. Hardly any multilateral approaches have been adopted to bring the
various actors involved to the negotiating table. Proposals aimed at assigning the WTO
responsibility for energy policy do not appear to hold much promise of success. For one
thing, the forum is, in its present state, simply not in a position to take on another major
issue. For another, some important exporting countries, such as Iran, are not WTO
members. Other producing countries, such as Saudi Arabia, have recently become mem-
244

ers, but their energy sectors have been explicitly exempted from the WTO’s rules. The
situation would be similar if Russia should fi nally join the WTO. The negotiation and
implementation processes for other agreements, such as the Energy Charter worked
out in the OECD framework or the Multilateral Agreement on Investment, are making
no progress. For the foreseeable future, little chance is seen for framework agreements
aimed primarily at further liberalizing energy markets and opening the exporting countries
for foreign direct investment, the main reason being that most producing countries
reject liberal competition rules for their energy sectors. But this is not to say that there
are no common interests among the industrialized countries, the emerging countries,
and the exporting countries that might at least provide a point of departure for some
fi rst steps on the road to cooperation in regulating relations between producers, importers,
and transit countries. Even in a buyer’s market, the aim of security of supply for the
consuming countries meets with a desire on the part of the producing countries to export
their energy resources on a continuous basis. Security of production and transportation
infrastructure is likewise in the interest of both parties. What is urgently needed, however,
is energy cooperation with the emerging countries. In the fi eld of energy as well,
asymmetry in multilateral policy dialogues is more than likely to lead to misjudgments
and misinterpretations on the part of both the emerging countries and the industrialized
countries involved. In seeking to achieve energy security, China and India have thus far
given preference to exclusive supply agreements over the market mechanism, as well as
to bilateral relations over multilateral solutions. Distrust of the oil market and of joint
approaches to “energy governance” runs deep. In recent months the international energy
market has not exactly proven generous to the Chinese newcomer. And the (successful)
defensive political battle waged in the US to fend off a Chinese company’s billion-dollar
bid for UNOCAL, a California oil corporation, and the protectionist refl exes it triggered
have not done much to foster trust. But whether or not this approach would actually lead to
more energy security has already become a contentious issue, at least in China. In the years
following the 1970s oil shock, the Western industrialized countries were generally disappointed
with their experiences with strategic oil partnerships; many of the energy agreements
China has concluded are risky, and there is considerable doubt as to whether they
will ever pay off – for example, in the case of Iran. Finally, the bulk of the oil China imports
must be shipped to East Asia via sea lanes that are controlled by the US. In the framework
of ASEAN+3 China is already seeking more cooperation, for example, on the development
of a regional strategic oil reserve. This would be a good entry point for an intensive and
institutionalized energy dialogue geared to gradually strengthening the confi dence of the
emerging countries (and industrialized countries) in cooperative solutions.
Facilitation
Looking to its security of supply, Europe would be well advised to diversify its import
structure as a means of improving the supply market; to build up strategic gas reserves
to cover short-term crises; to foster and expand strategic partnerships with important
producing countries; to provide impulses to work out a broadly accepted multilateral
framework for energy policy; to use technological innovations to improve energy effi -
ciency; and to advance the use of new sources of energy. 34
34 Dietmar Dirmoser, Energy security: New shortages, the revival of resource nationalism and
the outlook for multilateral approaches, Compass 2020, Friedrich-Ebert-Stiftung, Berlin, 2007.
245

The link between the climate debate and the energy issue is one reason to fear that
the decision to phase out nuclear energy will be increasingly challenged. Here it would
be essential to take a completely unambiguous position. Far from solving future energy
problems, nuclear energy is bound to create new ones. Uranium itself is a scarce resource,
the technology creates substantial security problems (protection against attacks,
proliferation), thus far no permanent disposal sites have been found that are at once technically
robust and acceptable to society, and, fi nally, nuclear energy is part and parcel of
the old “command and control markets” and therefore not competitive.
In Germany energy policy is regarded above all as supply(-side) policy. In the future
it will be increasingly important to gear energy policy less to the small number of suppliers
than to the large number of consumers concerned. Attempts to manage demand
should focus on both energy security (reduction of imports) and the international climate
targets. Efforts need to be redoubled in the future to exploit the resource of “effi ciency”,
and this means above all a need for technological innovations (for example, in the transportation
sector), legislative measures (for example, designed to promote heat insulation
of buildings or to improve automobile fuel mileage), and information and education (for
example, labels, so-called energy passports, and so on).
What is most needed on the supply side is efforts to reduce marked dependencies
in gas imports: seven EU countries import 100% of their gas from Russia. This, however,
would call for major investments (for example, in infrastructure for liquefi ed gas
transport), fl anking political energy-security measures (for example, the Nabucco pipeline
project from Central Asia to Europe), and a common European policy toward Russia.
Many of the goals formulated in energy strategies will come to nothing if individual
countries continue to foster their special relationships with Russia, while others, with an
eye to their neighbor to the east, are calling for an “energy NATO”. Instead of further enlarging
national energy policies, what will be essential for Europe’s energy security in the
coming years is that the member states take steps to transfer responsibilities for energy
policy to the European level.
As regards the emerging countries, it would be important to seek to open the International
Energy Agency to non-OECD members. This might start out with some fi rst projects,
for example, efforts to build joint strategic reserves as well as a dialogue on energy effi ciency
and alternative technologies. Confi dence-building measures should include an unambiguous
US commitment to keep the international sea lanes open, a strict laissez-faire approach
when it comes to bids for oil licenses in Iraq, efforts to promote, instead of prevent,
joint ventures with the emerging countries in the energy sector, technology transfers in the
fi eld of renewable energies, and a generally more sober sense of proportion as regards the
effects of the Asian countries’ engagement in the energy sector.
246
IV.6 You don’t need a weatherman to know which way the wind blows
Now that the “big narratives” and the fi erce ideological debates between the political
systems are over, what remains is a fi eld that is as well suited for passionate discussion
as it is for splitting the world up into camps: climate and the environment. The ongoing
scientifi c, political, and social discussions could hardly be more contentious, the interests
of the actors involved are contradictory in nature, and the complexity and inertia of
the world’s climate and ecosystems contribute to increasing our uncertainty about further
development. At the same time, climate and the environment constitute, in a sense

more tangible and manifest than in practically any other policy fi eld, global challenges
that can be effectively addressed only on the basis of global approaches. These are longterm,
complex problems that extend far into other fi elds – economic, social, cultural,
technological, and security – and the great diversity of actors involved (state, non-state,
and private) will make environmental and climate policy a test bed for the development
of effi cient and equitable forms of global governance.
SOS signals
For the past decade science has been split into two camps: the skeptics, who view the
thesis of climate change with a critical eye, and the admonishers, for whom the available
evidence on global warming is already suffi cient. Forecasts on global climate change and its
impacts have remained highly controversial. But thanks not least to the report prepared by
former World Bank Chief Economist Nicolas Stern and the Fourth Assessment Report issued
by the Intergovernmental Report on Climate Change (IPCC), the second position now
appears to be gaining more acceptance among politicians and the general public.
While carbon dioxide levels in the Earth’s atmosphere are higher today than they
have been for 300,000 years, it is still diffi cult to say how the climate system will react.
The IPCC Report predicts that in this century average temperatures will rise between
one and four degrees. The difference between these values is substantial, however: while
it might still be possible to adapt to a temperature rise of one degree, an increase in
the magnitude of four percent would be likely to have devastating consequences for the
world’s ecosystems. Under the IPCC Report’s worst-case scenario, by 2020, and assuming
a temperature rise of one percent, 30% to 40% of all species would be endangered
and extreme weather events would increase in frequency; by 2050, and assuming a temperature
rise of two degrees, the world’s biological systems would start to change, a development
that would have severe consequences for the world supply of food and water,
and entail, for many coastal regions, an acute risk of fl ooding; by 2080, and assuming a
temperature rise of four degrees, sea levels would be likely to rise by four to six meters,
aggregate world output would plummet, and some 40% of the world’s animal and plant
species would be extinct. But the fi rst changes have already become visible: the Arctic
ice cap is melting faster than expected, Europe’s glaciers are shrinking dramatically, and
the areas of distribution of various species have changed markedly. This is not to say that
the dispute over the causes of climate change and the best approaches to dealing with its
consequences is over; but it has become more diffi cult to dismiss the forecast warnings
as mere apocalyptic prophecy.
But even beyond the narrower climate discussion there are unmistakable SOS signals
indicating that pressure on the environment continues to mount. The most pressing
challenges include the growing scarcity and declining quality of natural resources (soil,
drinking water, fi sh, timber), the threat to a biodiversity that is of immense value for
present and future generations, widespread degradation of the biosphere (oceans and
rainforests in particular), and the urbanization of world society: a total of 10 million hectares
of virgin forest is cut down every year, while the erosion and deteriorating quality
of soils pose a danger to agricultural production. Today 250 million people are directly
affected by desertifi cation, and a further billion are at risk. Nearly half of the world’s
wetlands, which are important for the world water balance and supply, were lost in the
course of the past century. Viewed in terms of the sustainability of the world’s fi sh stocks,
today’s fi shing fl eets are roughly 40% larger than they should be, and 70% of the most
247

important marine fi sh species are either overfi shed or have already reached their biological
limits. The OECD countries produce four billion tons of waste per year. In Germany,
the US, and Japan the volume of waste generated has increased by 28% during the past
30 years; but it is above all in the populous countries of Asia that waste production will
become a serious problem.
Precarious environmental imbalances
The world’s regions are affected in very different ways, however, and the gap is growing
between developed industrialized countries, which have zones with relatively stable
environmental conditions, and the less developed regions, which are faced with a situation
of dramatically growing environmental degradation. These imbalances are exacerbated
by three additional factors: the regions whose societies are most dependent on
natural resources are hardest hit; the people most affected are often not the chief perpetrators;
and the hardest-hit regions for the most part lack the necessary adaptation and
coping capacities.
Especially in Europe, but also in other countries of the North, environmental technology
and new methods and processes have contributed to stabilizing and improving
environmental conditions. Energy-effi ciency technologies, but also efforts to reduce car
traffi c (such as the congestion charge recently imposed in London), have appreciably cut
pollution levels in urban agglomerations, and a growing ecological awareness has led to
the production of more environmentally-friendly goods and the creation of more and
more nature conservation areas. Biodiversity has largely stabilized. But environmental
setbacks have occurred in the maritime zones along the Mediterranean, where pollution
has risen sharply. A number of countries, mainly in south and southeast Europe, are
faced with freshwater scarcity.
The responsibility of the industrialized countries for a large share of the world’s pollutant
emissions, resource consumption, and waste generation, however, stands in glaring
contrast to the developed regions’ success in stabilizing their own ecosystems. The
industrialized countries’ “ecological footprint” extends far into the other regions of the
world. In recent years these countries have been able to improve the quality of the environment
within their own borders, but by passing the growing environmental costs of
their prosperity on to the countries of the South – either directly, by having their ships
scrapped in low-cost countries such as India and Bangladesh, or indirectly, by having
their toxic IT wastes “recycled” in Asia and Africa. The integration of a number of developing
countries into the global trade system as suppliers of raw materials is also leading
to a redistribution of environmental burdens due to the environmentally harmful methods
used, for example, to extract and process mineral resources in situ.
The developing countries are, furthermore, particularly vulnerable to the impacts of
climate change. Even minor changes to climate can impede access to safe drinking water,
impair the productivity and use of agricultural land, or encourage the spread of (infectious)
diseases. There is also a close correlation between poverty reduction and environmental
development: people living in absolute poverty are wholly reliant on access
to natural resources, and any deterioration of the quality or availability of such resources
constitutes a direct threat to their existence. Moreover, people in absolute poverty
are more directly exposed to the impacts of extreme weather events, such as fl oods or
drought. If the sea level should rise by 50 cm – that is, by half of what optimistic forecasts
predict – then some two million people would be forced to leave the Nile Delta, and a rise
248

of one meter would adversely affect 25 million people in Bangladesh. Conversely, many
people in developing countries are forced to overexploit natural resources to sustain their
livelihoods. The growing scarcity of resources, but also the anticipated sharp rise in the
number of environmental refugees, hold substantial confl ict potential. Climate change
can thus constitute a crucial barrier for development and an important instability factor.
It will be virtually impossible to reach the Millennium Development Goals without a
comprehensive environmental policy. But without economic and social progress, it will
not be possible to implement environmental protection in the developing countries.
Two developments in particular have in recent years served to sensitize the industrialized
countries and challenge the defense mechanisms they have used to deny the state
of the global ecosystems: Hurricane Katrina showed that even the developed countries
may be highly vulnerable to extreme weather events – and the substantial costs they
entail. The Stern Report estimates that by 2100 the economic costs of climate change
could reach 20% of GNP, and that they could therefore trigger deep recessions. The rapidly
growing economies of some emerging countries and adjustment in the consumption
styles of a new middle class in these countries have begun to alarm the world’s already industrialized
regions, and environmental aspects are part of this picture: by adopting the
growth path of the industrialized countries, China, India, and Brazil have cast a new light
on the overexploitation and the fi nitude and vulnerability of global environmental space.
Business as usual in the industrialized countries, in the countries that are the world’s current
growth champions, and in a handful of other countries about to take the leap would
inevitably lead to environmental collapse. What is needed to stop this development is a
process of rethinking, above all in the industrialized countries, and the required outcome
is a drastic reduction of resource consumption based on conservation and greater effi -
ciency. Only in this way will it be possible to gain the support of the emerging countries
and countries in transition for a more environmentally compatible development path.
Environmental architectures
The challenges are grave, the ecological prospects are at times bleak, and we seem to
be rapidly approaching the tipping point from which there is no return. But environmental
and climate policy are now on the move as well, and this gives reason to hope that
joint efforts will be possible in the future: climate protection is once more on the agenda
of the most important international forums, for example, at the G-8 summits in Gleneagles
and Heiligendamm; it was a priority issue of the German EU Council presidency
and at the core of the Lisbon Agenda; in the US, regional emission-reduction initiatives
(for example, in California and New York) have shown that the rejectionist front is crumbling;
China has now identifi ed massive environmental degradation as an impediment to
its growth; German industry sees in the environmental (technology) market one of its important
future markets; and a new environmental movement, one with actors recruited
also from outside the classic environmental community, seems to be in the making.
One serious drag on international environmental and climate policy is the fact that
its institutions are weak and quite widely dispersed. Some 240 regional and global environmental
agreements add up to a virtual jungle of regimes, though one that has already
posted a number of successes in individual, in part highly specifi c areas (such as the Ozone
Protocol or the Rio Conventions, which are designed to protect the world climate, preserve
biodiversity, and combat desertifi cation). The Kyoto Protocol, which sets, for the fi rst time,
binding limits for emissions of climate-damaging gases, must certainly be seen as a break-
249

through in climate policy. At the same time, the reduction goals, lowered again and again
and by no means suffi cient, and – above all – the seven-year ratifi cation process clearly
indicate how diffi cult it is to reach agreements on environmental issues. Progress in international
environmental policy is being made at a very slow pace. The greatest obstacles
include the need for consensus on decisions and the fact that some agreements lack binding
force because some individual countries have opted out of them; the protracted ratifi cation
procedures; a lack of enforceable sanctions; and substantial coordination problems
between the various institutions and protocols involved. The parallel existence of numerous
protocols and conventions, bilateral standards, and corporate responsibility pacts and
declarations refl ects both the diversity of interests and issues involved and the weakness
of global climate and environmental policy. The fragmented international institutions – including,
for example, the United Nations Environment Programme – which could potentially
serve as a peg on which to hang the highly diverse set of environmental agreements,
lack suffi cient resources, are ineffective when it comes to decision-making procedures,
usually lack powers of their own, are weak on implementation and poorly coordinated. In
the fi eld of environmental and climate policy there is no regulatory institutional framework
of the kind provided for by the WTO or the IMF and the World Bank.
Proposals for a future global environmental architecture are not lacking, however: in
the late 1990s France came out – albeit unsuccessfully – in favor of a global environmental
organization that would serve to integrate the great number of existing environmental
agreements. The advantage of a central institution would be that it would be in a position
to assert itself vis-à-vis the other powerful global institutions, to improve the coordination
and coherence of programs, and generally to give more weight to the implementation
of environmental agreements. But critics have objected that the complexity of the
issues and actors involved in environmental policy speaks less for a centralized solutions
than for the creation of fl exible alliances and environmental clusters – although these
would at the same time need to be better coordinated.
There is also reason to doubt whether the proposed new global environmental organization
would in fact be able to remedy the problems posed by insuffi cient resources, lack
of political will, and a need for further integration. Instead of creating new structures,
the aim of other proposals is therefore to implement environmental agreements more
effectively, to improve the quality and effectiveness of existing institutions, and to “mainstream”
environmental policy. This would imply a need to integrate more environmental
expertise into the existing development, trade, and fi nancial institutions – in particular
the World Bank; in their project agreements the multilateral banks, the IMF, and the
WTO would have to give more space to environmental aspects, and national governments
would be expected to make environmental compatibility a key criterion of, for
example, their development policies.
Scenarios on the future development of climate and environmental policy indicate
that one crucial element is the need to establish strong institutions with a view to leading
the world on to a sustainable climate course. Whether this succeeds will depend mainly
on the shape given in the coming years to the relationship between industrial, developing,
and emerging countries, as well as between the state, market actors, and society. One
of the reasons why environmental and climate policy will become a test case for global
governance is that while in the years to come there is likely to be a need for quick, effective,
and global action, policy needs staying power to bridge the time difference between
action and visible effect.
250

More than hot air …
In the coming years Germany could play an important role in international environmental
and climate policy: its multilateral orientation, the presence of German representatives
in top positions in environmental organizations, a solid environmental balance,
the fact that the UN Climate Secretariat is headquartered in Bonn, its innovations
in environmental technology, and its generally environmentally aware and interested
population all mean that Germany has the conditions needed to establish – also at home
– “foreign environmental policy” as a central policy fi eld. 35
The fundamental precondition here would be further successes in attaining a positive
environmental balance in the national (and European) framework. The development of
environmental and climate policy is a global challenge, though it also involves possibilities
for national and local action. These would include efforts to meet agreed targets and
to give more space to environmental aspects when it comes to approving export credits,
the development and implementation of new environmental technologies (energy effi -
ciency and waste disposal), a process of rethinking in the energy sector, and promotion
of alternative energies (in particular, solar energy), ecological adjustments to the tax system,
and a public debate on energy consumption and consumption patterns. Air traffi c
should be included in emissions trading, too.
These “confi dence-building measures”, which – for the industrialized countries –
would include efforts to induce Japan to reengage in climate policy and – above all – to
induce the US to return to a climate regime, could help to win over the rising powers for
further integration into a climate regime. Strategic partnerships with the anchor countries
are also of particular importance for climate protection. India, Brazil, and China
are already responsible for close to one quarter of worldwide greenhouse-gas emissions;
Russia, Indonesia, and Brazil have signifi cant forest areas. An agreement that includes
the US, India, China, the EU, Russia, and Japan would already cover two thirds of total
world CO 2 emissions. Binding targets, agreed to in particular by these countries, would
be an indispensable element of a future climate-protection architecture. Germany should
use its good relations with these countries and its leading position in environmental
technology to bind these countries more closely into the post-Kyoto process and to step
up technology cooperation in environmental areas.
But climate policy is also and above all a question of equity. There is no way to tackle
the problems of climate change sustainably in a divided world. Climate protection must
therefore be keyed to standards of equity, and it should be paid for chiefl y by those who
are most responsible for the problems involved. This would include an equitable distribution
of contributions to climate protection (based, for example, on the criteria “reduction
potential” and “capacities to fund measures”), participation of the industrialized
countries in the funding of the measures needed to adapt to climate change that can no
longer be avoided (with some of the resources involved fl owing back to the industrialized
countries in the form of technology exports), and generally greater efforts to conceive
environment and development as one.
On the basis of these confi dence-building measures, it could well be possible to come
up with a more effective and comprehensive environmental and climate architecture. Each
of the – roughly speaking – three positions encountered in the debate (further development
of existing institutions such as the UNEP, establishment of a new global environmental
35 Herrmann E. Ott, International climate policy 2020: A challenge for German (environmental)
foreign policy, Compass 2020, Friedrich-Ebert-Stiftung, Berlin, 2007.
251

organization, and mainstreaming of environmental issues) has its advantages and disadvantages.
But the different concepts are not mutually exclusive, and many of their elements
are complementary. In the years ahead efforts to found a new special organization are unlikely
to fi nd support from either the US or developing countries. A more likely scenario is
a reorientation of UNEP, which would include closer cooperation with UNDP. The problem
will be how best to improve the global visibility and clout of environmental and climate
policy without neglecting the need for the participation of the important civil society actors
involved in the fi eld of environmental protection and without losing sight of the different
levels of action at which the complex problems are articulated.
252
IV.7 “Here am I Man, here Man may be …”
A person’s fi rst and inalienable rights are received at birth: human rights. All men
and women are entitled to their human rights – “without distinction of any kind, such as
race, colour, sex, language, religion, political or other opinion, national or social origin,
birth or other status” (Universal Declaration of Human Rights). The purpose of human
rights is to protect human dignity, and in this function they must remain indivisible.
Human rights form an integrated whole consisting of civil, political, economic, social,
and cultural rights that are equal and interdependent. It goes without saying that this
necessarily implies the universal validity of human rights: wherever, and into whatever
cultural context, a person is born, that person is entitled to his or her human rights.
This at least was the basis of the idea adopted in the United Nations Charter in 1945
in response to two world wars and the period of inhuman National Socialist and fascist
tyranny. Since then, seven core conventions have been concluded in addition to the Universal
Declaration of Human Rights (1948): the International Covenant on Economic, Social
and Cultural Rights (1966), the International Covenant on Civil and Political Rights
(1966), the International Convention on the Elimination of All Forms of Racial Discrimination
(1965), the Convention on the Elimination of All Forms of Discrimination against
Women (1979), the Convention against Torture and Other Cruel, Inhuman or Degrading
Treatment or Punishment (1984), the Convention on the Rights of the Child (1989), and
the International Convention on the Protection of the Rights of All Migrant Workers and
Members of Their Families (1990).
As this enumeration shows, human rights are not without a history; over the decades
human rights have also been subject to “generational change”. The classic, civil, and political
human rights are part of the fi rst generation, or fi rst dimension, of human rights;
the second dimension focused more on economic, social, and cultural rights; while the
third and – at least for the present time – last dimension demands “meta-” human rights,
such as the rights to peace, a clean environment, and development. The right to development
has in the meantime been included in the catalogue of human rights; above all it
more strongly reminds the international community of its obligation to enforce human
rights, even in countries that have proven unable or unwilling to do so.
The implementation of an idea
However, demands cannot have an impact if they are not concretely addressed – and it
is here that the discussion begins, for the question of implementation is every bit as political
as the idea of human rights is reasonable and plausible. There is doubtless no other fi eld
of national and international action where the difference between rhetorical commitment

and actual behavior, between norm and practice, is a great as it is in relation to human
rights. International law obliges the state to respect, protect, and guarantee human rights
– after all, the state is the signatory of the human rights conventions, which means that
the nation-state is responsible for guaranteeing human rights. At the same time, human
rights are the normative basis of both humanity and the state. They therefore have precedence
over other principles characteristic of the state, including ideology, the nation, or
culture, and they thus also serve to protect the individual from the state, the presumptive
“upholder” of his or her human rights, which means that the state is obliged to provide protection
against arbitrary state practices such as forced labor, child labor, torture, or indeed
genocide. In states no longer able to exercise their responsibility to protect because of their
weak structures or powerless institutions, or because they have lost their monopoly on the
legitimate use of force – that is, in failing or failed states – or in states that themselves violate
the human rights of their population, the responsibility to protect human rights must
be assumed by another authority, and this can and must be the international community.
While one question that arises in this connection is the extent to which international organizations
are bound by human rights standards, the fact is that their members – all of
them states – are bound by these standards. This is of course easier said than done – and it
is hard to imagine a state that would voluntarily relinquish its sovereignty or own up to its
responsibility for the human rights violations it has committed without being subjected to
severe pressure. When it signs a human rights convention, a state accepts its duty to report
on its actions, and theoretically it must also accept the possibility that individuals or other
states may initiate proceedings against it; but the United Nations is unable to enforce compliance
– unless it invokes Chapter VII of the UN Charter, which has been used rarely to
impose economic sanctions and even more rarely to impose military sanctions or to order
a so-called “humanitarian intervention”.
One other aspect that needs to be viewed in connection with humanitarian interventions
is the recent development of efforts to establish international relations on a legal
basis, which would include the establishment, in 2002, of the International Criminal
Court (ICC), as well as former ad hoc tribunals such as those appointed for Rwanda and
the former Yugoslavia. As important as these unique international legal institutions are
for the development of human rights, the refusal of the US to ratify the ICC’s Rome Statute
is a clear sign of their limited scope. If Chapter VII is not invoked, the only means left
is for the United Nations or the numerous nongovernmental organizations active in the
fi eld of human rights to “blame and shame” an offending state.
Today the question of the – at least potentially – antagonistic nature of some principles
of international law (state sovereignty, the ban on the threat or use of force, and
the protection of human rights) is more topical than ever. In response to the 9/11 terror
attacks the protection of human rights have been pushed into the background in favor of
efforts to protect national security. In this connection particular consideration has been
accorded to the US high-security prison in Guantánamo, where the US is holding several
hundred terrorism suspects without regard to the rule of law, as well as to the interrogation
methods used by the CIA, which has at least tolerated the use of torture and mistreatment.
In July 2007 the latter practice occasioned the US President to ban the use of
torture during interrogations of terror suspects and to declare, fi ve years into the war in
Afghanistan, that the US would respect the provisions of the Third Geneva Convention.
In Germany, too, on the occasion of a case of child abduction in 2002, there was a controversial
discussion over whether the police were justifi ed in threatening to use force, or
253

more precisely, to use torture, to induce a suspect to testify against his will, provided this
would have prevented the child’s death. The fact that even in established democracies it
is – as noted above – possible to discuss the status of, or perhaps even to violate, human
rights, which enjoy absolute protection even in times of emergency, illustrates the need
for a more focused and consistent approach to human rights.
The reality of a norm
It is easy to say that human rights are indivisible; but whether this implies, for example,
that social rights may not be enforced at the expense of freedom, and vice versa,
or that women’s rights may not be diluted in a strongly male-dominated society, or that
the right to the free exercise of religion may not be relaxed in non-secular countries is
increasingly becoming a political question, and thus the subject of constant discussions
among the UN member states. In any case, the 1993 Vienna Declaration, signed by 171
countries, states in Article 5: “All human rights are universal, indivisible and interdependent
and interrelated”. 36
Implementation of this provision seems to be more diffi cult when it comes to the
right to decent working conditions, however. Here it less the world of states than its
business enterprises that are obliged to respect and guarantee the rights of the people
they employ, and so to prevent, for example, child labor and forced labor as well as other
“modern” forms of slavery. There is no international body that could induce companies
to enforce decent working conditions in the failing or failed states referred to above,
which are unable to apply whatever national labor laws they may have, or in countries
that fail to enforce the so-called Core Labor Standards. Here international law runs up
against its limits, for it is only states – the exclusive subjects of international law – not
business enterprises, that can be held accountable in such cases. And while the so-called
Global Compact – an agreement reached in 1999 between the United Nations, civil society,
and business enterprises – takes up this problem complex, with its members declaring,
with their signatures, their willingness to work for compliance with minimum social
and economic standards and promotion of human rights, the Compact’s members need
not fear any sanctions if they do not match their verbal commitment with concrete actions.
The German Institute for Human Rights entitled its 2007 Yearbook Private or State?
Achieving Human Rights!, and Irene Khan, Amnesty International’s Secretary General,
addresses the issue in her foreword to Amnesty’s Report 2007, noting: “Corporations
have long resisted binding international standards. The United Nations must confront
the challenge, and develop standards and promote mechanisms that hold big business
accountable for its impact on human rights”. 37 In saying this she is also expressing the
sentiments of several non-state organizations that have already threatened to pull out of
the Global Compact if the United Nations does not give it a more binding framework.
The German development ministry, the Federal Ministry for Economic Cooperation and
Development, has reaffi rmed the implementation of the Core Labor Standards as a goal
in its Action Plan on Human Rights; in addition, the type and scope of development cooperation
the ministry provides is conditional on the labor standards practiced in partner
countries.
254
36 www.unhchr.ch/huridocda/huridoca.nsf/(Symbol)/A.CONF.157.23.En, 17 July 2007.
37 http://thereport.amnesty.org/eng/Download-the-Report. Friedrich-Ebert-Stiftung, Berlin, 2007.

Instrumentalizing culture
Having looked at the discussion on the indivisibility of human rights the discussion,
no less controversial, on the universality of human rights now follows. Although the universality
of human rights, now enshrined in the Universal Declaration of Human Rights,
has been justifi ed differently in political, philosophical, theological, and even legal terms,
it has been challenged again and again with the argument that some human rights bear
unmistakable signs of Western infl uence and are therefore not in any real sense applicable
to other cultural areas. In Western cultures, it is argued, the individual is given a higher
value than the community; the opposite is the case, it is claimed, in other societies, where
the community counts more than the individual. This colonialist-sounding argument can
be refuted by pointing out that human rights protect the rights of every human being, so
laying the groundwork for a community-oriented life in human dignity. The universality
of human rights must be emphasized precisely in times in which religion has (re)gained
a toehold in politics; that is, when both private and offi cial religiosity have again come to
serve as a measure of value orientation, 38 something which secular societies believed had
been overcome with progressive modernization. The UN Charter was signed by nations
representing all world religions. A religiously motivated political fundamentalism cannot
be justifi ed with reference to the right to freedom of worship, but must instead be seen as
an outgrowth of social, economic, or political crises that are in need of political resolution
by the international community. It is no more legitimate to use religion to justify human
rights violations on the one hand than it is to use the need for security or the fi ght against
international terrorism for the same purpose on the other. There is no way to resolve these
confl icts without refl ection on the universal and indivisible nature of human rights.
An action plan for human rights
Germany is party to all important human rights conventions, has been a member of
the UN Commission on Human Rights Commission since 1979, and received 154 votes
in its election to the Human Rights Council created in 2006 to replace the Commission
on Human Rights – the highest number of votes in its regional group. 39 This would seem
to indicate that Germany is taken seriously on human rights, but also that its active engagement
is expected in the further development of human rights. The main focus here
should be on issues important to the developing world, including the right to development,
social and cultural rights, and enforcement of the Core Labor Standards. “This
human rights dialogue should be positioned within the broader context of multilateral
negotiations such as those on UN reform, WTO trade policy, ILO social standards, the
Millennium Development Goals and development policy, and it should be addressed as
a single complex”. 40
Further upgrading of the Human Rights Council as a means of ensuring that the UN
continues to play a leading political role in human rights in its interaction with other international
organizations is crucial. The new annual “Universal Periodic Review” created
in 2006 in connection with the transition from the Commission on Human Rights to the
Human Rights Council will have a central role to play here. The review should be used
38 Thomas Meyer, Religion and politics: A revived area of confl ict, Compass 2020, Friedrich
Ebert Stuftung, Berlin, 2007.
39 Erfried Adam, Human rights and international social policy: Constraining the anarchy of
power, Compass 2020,
40 Ibid., p. 20.
255

not only to cite human rights violations but also to condemn them in the form of concrete
recommendations for action to be taken by the countries concerned. Due to its members’
different expectations and interests, the Human Rights Council will have to negotiate the
danger that it might be shunted on to a path of inaction. Germany should use its weight
in the Human Rights Council to make the Periodic Review a politically effective instrument
for the enforcement of human rights, in this way helping to establish the United
Nations as an organization that not only sets standards, but also implements them.
In this connection Germany should work to give more binding force to the Global
Compact – also in its own interest. After all, Germany conditions its development assistance
on the implementation of the Core Labor Standards, and it needs reliable indicators
for the purpose. As early as 2005, the UN Sub-Commission for the Promotion and
Protection of Human Rights proposed a set of “Norms on the Responsibilities of Transnational
Corporations and Other Business Enterprises with regard to Human Rights”;
responsibility for their implementation lies with the member states, however. Germany
could play a leading role here. It would be absolutely essential to include civil society
organizations in these efforts, since the former are an important component of the
Global Compact and have already committed themselves to working to give standards
more binding force. To supplement this standards-based approach to the enforcement
of human rights in business enterprises, it would make sense to underline the actual
and effective correlation between human rights – and here in particular the right to life,
freedom and security – and international competitiveness. For it is not only the business
enterprise that is forced to deal with the consequences of indecent working conditions or
even forced labor – injuries, lower life expectancy, low levels of identifi cation with work,
and low motivation to work – the state, too, is adversely affected in that it is forced to bear
the overall economic and social burden. Furthermore, a country engaged in international
or regional trade is obliged to meet the standards laid down in trade agreements; and if a
state fl outs international human rights standards, it will not be the country of choice for
many foreign corporations on the lookout for a business location that offers reliable legal
and internationally accepted framework conditions.
As far as Germany is concerned, it would make sense to elaborate a “National Action
Plan on Human Rights” designed to achieve a coherent, interministerial human rights
policy, and including civil society organizations such as the German network Forum Menschenrechte.
41 The German development ministry’s (BMZ) present Action Plan on Human
Rights should be incorporated into the national action plan, which should also defi ne
Germany’s contribution to the worldwide enforcement of human rights.
Developments in recent years also show that not only the universality and indivisibility,
but also the concrete formulation of human rights must be emphasized. Here Germany
should, regardless of its own strategic or political interests, insist on the primacy
of human rights – in the fi ght against terrorism no less than in dealing with a politically
motivated fundamentalism justifying itself on religious grounds.
256
IV.8 New world, old order? Government and governance
Issues bound up with governance and government – that is, the process of adapting
the nation-state to the new conditions, the further development and consolidation of statehood
in developing countries, and efforts to build stable and effi cient regional and global
41 Ibid.

structures – will be one of the key challenges of the years to come. The outcome will be one
factor determining success or failure in the other core areas of the global agenda.
Statehood under pressure
For years, there has been a growing discrepancy between the social affairs to be regulated
by policy and the governance capacities available for the purpose. Above all in the
fi elds of health, education, and social welfare, policy continues to be heavily bound to
traditional national structures. However, their power to shape policy is in decline, due to
growing interdependencies and the pressure generated by global problems, as well as an
ongoing process of sovereignty transfer to supranational institutions, and the competition
of new global actors. A deliberate policy of relinquishing political control and fostering
deregulation and a general discrediting of statehood also play a role.
In fact, a process of internationalization has been in evidence for years now, in the
form of standards and norms, treaties, and obligations. Today, 80% of all European economic
regulations are rules and directives adopted by the Council of Ministers in Brussels.
All the same, the nation-state remains – despite a tangible loss of substance – the
central place where policy is made, at least until new sovereignties are created at other
levels that serve to boost democratic participation and the effi ciency of decision-making
processes.
On the other hand, it is not the modern nation-state but a fragile, “precarious” statehood
that has become the norm of political organization in most developing countries.
Efforts to maintain or to build state structures are faced with many different threats: debt
crises, conditionality-based economic programs, elites that regard the state as their “prey”,
social inequality and poverty, insecurity; in other words, a general delegitimization of statehood
and its representatives. Many such countries will now have to get on with their faltering
state-building efforts under conditions dictated by global economic processes and in a
situation in which the vibrancy of the nation-state model seems to be waning.
The majority of developing countries have long had to struggle with impaired statehood.
In the 1990s, however, weak, failing, and – in particular – failed states were recognized
as a problem of international politics, with major consequences for the industrialized
countries: for example, migration, terrorism, and organized crime.
By contrast, in recent decades democracy has become increasingly attractive as both
a system of government and an international norm. The “third wave of democratization”
(Samuel P. Huntington) has caught up numerous countries in its fl ow, and today two thirds
of all countries are electoral democracies, more than half of them with extensive political
freedoms. The sustainability of this development is by no means ensured, however. The
further development of “defective democracy” seems to be blocked in many countries, and
restrictions on civil liberties or a lack of checks on the executive are often accepted as a
permanent state of affairs. The legitimacy of young democracies is eroding because they
are unable to satisfy the hopes placed in them for more participation, social justice, and
security. 42 The fi rst contours of new models, such as “sovereign democracy”, and variants,
such as “developmental democracy” and Islamic democracy – in which the concentration
of power and restrictions on civil liberties are justifi ed with reference to local mentalities,
religion, or a given course of economic development – are already recognizable, and in
42 Marika Lerch, Democracy in the ascendant? Opportunities and limitations of strategies to
promote democracy, Compass 2020,
257

future these tendencies might well come to constitute a standpoint antagonistic to “liberal
democracy”. Apart from the political, economic, and social processes at work there, efforts
to strengthen and breath life into the standard of “liberal democracy” in these countries
themselves will also depend on whether such efforts are embedded in an effective global
governance structure that is able to guarantee realization of the three pillars formulated by
Kofi Annan – freedom from want, freedom from fear, and freedom to live a life in dignity.
New political sovereignties?
While it is true that the existing political structures continue to be underdeveloped
and limited in scope in the face of pressing global problems, a number of regulatory
systems and regimes – generally referred to as “global governance” – have emerged in
the past two decades that focus on politics beyond the nation-state – some of them binding,
some based more on soft power, some formal, some more informal in nature. Apart
from a largely governmental multilateralism and its core institutions (UN BWIs, WTO,
NATO), today regional organizations (above all the EU; see Section 5.1), supranational
and international law, civil society organizations, and private actors (mainly transnational
corporations) are among the important components of this framework. A number
of developments in the 1990s gave reason to hope that all this would give rise to a new
structure designed to solve global problems. These developments included a renaissance
of regional cooperation – especially in Sub-Saharan Africa, South America, and Southeast
Asia – a broadly conceived process of juridifi cation (for example, the introduction of
international criminal tribunals), new institutions (such as the WTO) the broad engagement
– despite setbacks in Rwanda and Srebrenica – of UN Blue Helmet missions, some
fi rst initiatives and agreements on climate policy (Kyoto Protocol), gender issues, and
sustainable development, and the improved networking and global alliances of numerous
NGOs (for example, on the issue of landmines). The fact that the tasks that need to
be tackled collectively are growing in number is undisputed. At the same time, in recent
years we have experienced a growing tendency on the part of certain countries to exempt
themselves from global standards, as well as a waning willingness to cooperate in global
institutions. 43 While there was still talk of a “vigorous multilateralism” in the 1990s, today
national governments seem more prone to succumb to the temptations of unilateralism.
The 9/11 terror attacks and the war in Iraq were certainly turning points here, and protectionist
tendencies are also being fueled by the uncertainties facing world economic development,
as well as by new competitors in international markets. The existing system of
global governance is now coming under substantial pressure from various quarters.
Above all, the main pillars of multilateral cooperation – forums such as the UN, the
WTO, the BWIs, and NATO, but also the EU – are in crisis and are groaning under the
burden of their tasks and outmoded structures. This is closely associated with public
criticism of these institutions. Depending on its source, the object of criticism may be
the dominance in the international forums of the strongest countries and their interests,
their lack of transparency and possibilities for suffi cient democratic participation, their
strategies’ lack of coherence and effectiveness, weaknesses in their implementation and
enforcement efforts, and the fact that international politics is generally not subject to
suffi cient parliamentary control.
43 Jürgen Stetten, Multilateral institutions: Building new alliances, solving global problems,
Compass 2020, Friedrich-Ebert-Stiftung, Berlin, 2007.
258

The global arrangements that today form the backbone of economic and security cooperation
are, in essence, Western institutions. This “transatlantic multilateralism” now
sees itself challenged by the integration into the world market of the major emerging
countries, as well as by the realization that global problems such as climate protection or
energy cannot be solved without the integration of China, India, or Brazil. 44 One of the
crucial issues of global governance in the coming years will be whether it would be best
for these countries to be largely absorbed by the existing, Western structures, or whether
the institutions themselves need to be transformed. Strategic considerations, but also the
ponderousness of the international organizations, have led to mounting calls for more
fl exible and selective forms of international diplomacy, including ad hoc consultations,
contact groups (for example, Kosovo, Iran, North Korea), concerted action on the part
of the major powers, coalitions of the willing, South–North cooperation projects. These
groups’ policies are defi ned in their own capitals, and their legitimacy is based less on
representation than on the effectiveness and results of their cooperative efforts. The initiatives
are rarely integrated into the formal structures of global governance. These initiatives
may, from case to case, provide support (“global governance of the last resort”), but
they may also compete and undermine these formal structures.
A fragmented multilateralism?
A new protectionism, persistent distrust between the old powers and the new global
players, unilateralist refl exes, and a deadlocked EU could fragment the structures of
global governance even further, and there is no way of knowing whether they will be replaced
by new decision-making structures. There is much, however, that indicates that in
the coming years global governance will be more inclusive, but also more exclusive: the
big emerging countries will be better integrated into international cooperation, mainly
on the basis of “extended versions” of Western coordination and initiative mechanisms.
Otherwise the costs of implementing new rules, particularly in the fi elds of climate, fi -
nancial, and energy policy, would – in the eyes of the West – be prohibitively high. In the
eyes of the big emerging countries, in turn, further economic integration would lead to a
lock-in effect that forces them to become more involved in coordinating work on global
issues. This process of gradual integration could, in the medium term, pave the way for
the adoption of new structural elements in international relations, – such as the “L-20”.
The trend toward a “multilateralism à la carte” of the kind practiced by some infl uential
nations could gather momentum. Instead of “cooperation wherever possible”, the
motto might then be “cooperation wherever necessary”. However, “reformed” neoconservatives
such as Francis Fukuyama have expressed the hope that a multiform, but also
narrower multilateralism of this kind (“realistic Wilsonianism”) could serve to restrain
the American Gulliver and induce him to engage in multilateral cooperation. This development
will at the same time widen the gulf between the powerful and the powerless.
Classic North–South forums such as the UN could lose some of their relevance and infl uence
if key decisions were taken in the context of more exclusive multilateral arrangements,
from which for the most part the developing countries remain left out. There is
also a danger that while a particularist multilateralism would improve the effectiveness
of policy regulation, it would at the same time further cement the role of the executive in
44 Dirk Messner, The European Union: Protagonist in a Multilateral World Order or Peripheral
Power in the “Asia-Pacifi c” Century, in: Internationale Politik und Gesellschaft, Heft 1, 2007.
259

international politics, pushing back the infl uence of social actors and NGOs. However,
the role of the UN in this – all in all more fl exible – multilateralism could be strengthened
by fi nding a mix of intelligent global agenda-setting (for example, in climate policy), new
structural elements (such as a UN environment organization), a more clear-cut division
of labor between the UN and the regional organizations in peacekeeping, and a better
dovetailing of ad hoc groups and the more exclusive circles with the more comprehensive
structures of global governance.
Integration, cooperation, initiation
Unlike the globalization discourse in the early 1990s, which depoliticized the economy,
discredited the state, and sought to range global processes against the “Leviathan”,
the coming years will see the pendulum swing more in the direction of a rehabilitation
of the political vis-à-vis the economy. But the motto will have to be “Beware of extremes”,
and the search for new policy space will be geared more to pragmatic solutions – beyond
statism, but also beyond denationalization and demonization of state action. This will
open up the possibility of engaging in an open political debate on a modern conception of
the state, at both the regional and the global level.
The development of the European Union and its rule-based framework is highly conducive
to global governance structures. If the present tendency to cling stubbornly to formal
state sovereignties – one of the main obstacles to the development of effi cient regional
structures – should gradually weaken in the years ahead, a systematic regional exchange
could impart substance and fresh impulses to this new regionalism. Led by the EU, regions
could become more fi rmly entrenched at the political level, in this way becoming an important
building block of global governance. German policy should generally seek to develop
a higher profi le in international politics as initiator and agenda-setter. The negotiations on
the statute for the new International Criminal Court were a good example of this.
Germany’s policy, based on interdependent interests, is forced to rely on functioning
multilateral institutions, and at the same time the experience Germany has gained with
complex multilateral structures practically predestines it to active engagement in efforts
to adapt and reshape global governance.
Germany must make more systematic use of its relations with the large emerging
countries to forge new alliances. The policy fi elds best suited to the purpose would be
energy and climate policy, as well as international health policy. 45 A new forum designed
to bring the leading industrialized and emerging countries together would be a good
starting point for efforts to improve the coordination of international policy.
The coherence of international policy will remain one of the central challenges of the
years to come. Entry points at the global level include improved cooperation between
the multilateral organizations, as well as interregional coordination mechanisms. What
is needed at the European level is a stronger voice for the EU in international organizations
and a more fl exible mandate for negotiations in international forums. Finally, at
the national level, Germany should improve its efforts to manage coherence both among
ministries and in the policy fi elds that are most interdependent – trade, climate, confl ict
resolution, human rights, security. Appointment of a minister of state for global governance
might prove conducive to this purpose.
45 Wolfgang Hein, Global health: A policy fi eld of underestimated importance, Compass 2020,
Friedrich-Ebert-Stiftung, Berlin, 2007.
260

Establishment of a parliamentary globalization committee could help strengthen the
hand of the Bundestag and – in view of the fact that in parliament global issues are often
dealt with in isolation – at the same time prove conducive to discussing global challenges
with reference to issues that they have in common. On the other hand, any larger measure
of “executive multilateralism” could serve to severely restrict the Bundestag in its
political control function.
V. FISSURED WORLDS
V.1 Europe – The new City built upon a hill?
The European Union will remain the major construction site of German politics. The
nexus of relations here is extremely complex, and domestic and foreign policy are closely
interlinked. Some of the central problems of international and domestic policy are most
clearly in evidence here, too – we need think only of the future of the present welfare
model, Europe’s role as an interface to the Islamic world, migration, and the aging of
European societies. We also fi nd here the laboratory of the “postmodern zone” (Robert
Cooper), in which efforts are under way to develop intelligent institutions designed for
transnational government and to consolidate Europe’s integration, but also an example
for regions in other parts of the world.
At the same time, just about everyone considers the EU to be in a sorry state, under
serious threat from unresolved challenges. The rejection of the EU Draft Constitution by
France and the Netherlands, both founding members of the European Community, has
made it even more urgent to address the question of how European institutions should be
further developed. Furthermore, the Kosovo issue and the rift over Iraq have dampened
hopes of rapid progress on the Common Foreign and Security Policy; the unresolved and
increasingly pressing social question in European societies is serving to estrange more
and more people from Europe; there is widespread resentment at the “overextension” of
the EU caused by recent enlargements; and enlargement and consolidation are increasingly
viewed as antagonistic tendencies. Institutional and political crisis, enlargement
crisis, and social crisis are merging into a gloomy scenario in which the EU is not up to
meeting the challenges facing it and a twilight of the gods is approaching.
While the many different defi cits besetting the EU cannot be denied, a look at the
history of its integration can at least qualify the current crisis discourse. Economic and
monetary union has been achieved, and good progress is being made on increasingly
close cooperation in the fi elds of justice and internal affairs, as well as in stabilizing,
transforming, and integrating numerous eastern European countries. We can also point
to a number of more recent examples that serve to underline the Community’s capacity
for further development, as well as for effective policy-making. Furthermore, the fact that
the EU, in the course of its 50-year history, has grown from its original six members to
a membership of 27 in fi ve enlargement rounds shows that Europe has lost none of its
attractiveness. In the past as well, the Union has, following periods of fl ourishing, again
and again fallen prey to accesses of depression due to numerous blockades engineered
by special interests, failed projects, and the sheer complexity of the task facing it. Europe
was born of crisis, and crises are an elementary, but also productive, component of the
European integration process: indeed, it has been precisely in the diffi cult situations that
new ways were found of continuing European integration. It is not least for this reason
261

that an often sloganeering and fi nal crisis discourse has tended to chime with the political
preferences of those who see – and wish to see – in European integration little more
than a successful system of market regulation.
“What is Europe?” “Where is Europe?” and “Who is European?” – all these questions
have been subject to debate since the beginning of European unifi cation. The structure of
today’s Europe is diffi cult to defi ne: neither a confederation of states nor a federal state;
neither a “Europe of homelands” nor a “European superstate”; EU rule nevertheless extends
into the national space of each of the member states, the Union makes law and has
greater international infl uence than any other regional organization. The development of
this often confusing “system sui generis”, with its treaties and various supranational and
intergovernmental elements and bodies, does not follow an inherent functional logic,
but is the outcome of a series of gradual reforms that came about on the basis of political
compromise and under external pressure. The integration process is fundamentally
open, and Europe’s future political, social, and territorial form is in no way fi xed. Its
borders are not “natural”, but based on conventions and have been extended again and
again in the course of integration – not without occasional setbacks. In the coming years
Europe will experience friction over social, economic, and foreign-policy challenges, and
this will force it to (re)explore the space for new arrangements.
Europe must work
The EU’s legitimation crisis is seen as one of the central challenges facing continuing
European integration. Declining opinion poll ratings, alarmingly low turnouts for EU
elections (above all in the new member states), and failed referendums add up to a mixed
picture of lack of interest in European issues and growing resistance to projects designed
to deepen and enlarge the Union. It was long possible to push though and implement
European integration in the form of a purely elite project that rested on the tacit consent
of the population. The failure of efforts to adopt a common European Constitution appear
to spell the end of this epoch once and for all. If a better social basis is not found
for Europe’s path to integration, European development will be blocked. Furthermore,
questions bound up with the democratization of Europe, the overall balance of what Europe
has thus far achieved in social terms, and the way in which the integration process
is perceived and communicated are closely interrelated.
Despite having an anthem, a fl ag, and a currency, the EU remains a weak political
system with infl uential national governments, and there are substantial democratic
defi cits when it comes to mediating between these two levels. In fact, the European
institutional and decision-making system is not transparent, the European Parliament
continues to be weak, the national parliaments are poorly integrated into European affairs,
and European actors, including political parties, are far from suffi ciently visible.
All these are serious defects, but they could be at least mitigated by more participation
of society, for example, via direct elections for the President of the European Commission
or efforts to strengthen the powers of the European Parliament. To be sure, it is not
enough to point to the EU’s democratic defi cits: for one thing, the ongoing debate also
points toward a kind of “democratic isolation” on the part of the EU, with, for example,
national governments emphasizing – often for opportunistic reasons – abstract criteria
that could just as well be used to criticize political realities in any of the member states.
But what is sometimes termed “Brussels despotism” is for the most part subject to
more control, less corrupt, more transparent, and more representative than the politi-
262

cal systems of most member states. Moreover, the spectrum of tasks delegated to the
EU by the member states will determine whether and how the Union is able to develop
new legitimacy resources. In fact, European institutions are today mainly responsible
for fi elds that were, for the most part, already insulated from direct social infl uence
(monetary policy, technical standardization, economic diplomacy, jurisdiction) – while
the EU is largely excluded from policy fi elds in which decisions are taken on central
issues of (re)distribution policy and there is more social infl uence (for example, tax
policy, social policy, but also education policy).
For this reason, if the EU is to attain legitimacy in the coming years it must develop
resonant European projects, which also formed the basis of the “permissive consensus”
between Europe’s political elites and its population in the past. From the idea of European
reconciliation to the single European market, which prompted a positive “Europhoria”,
these projects formulated clear-cut aims of European integration, and for most people
they stood for peace, jobs, and growing prosperity. Since the early 1990s, however, this
consensus has increasingly unraveled. Mass unemployment and the unsuccessful search
for a (European) development model in which economic modernization is not attained
at the expense of social cohesion, a certain alienation from European politics and its
technocratic methods – including the strict convergence criteria – and a lack of progress
on social integration have tended to undermine what was once general approval. What
is more, when it came to the Maastricht criteria, which were used by many European
governments to justify their market-driven economic policies, the “exhausted” population
began to perceive Europe less as part of the solution than – increasingly – as part
of the problem. Today, between Porto and Prague, the idea of a purely economic union
will not be among the dreams of most Europeans. If Europe has “lost the plot” (Timothy
Garton Ash), the main reason is that it has been unable, as a political entity, to reach
agreement on projects with mobilization potential, and Europe’s politicization has been
thrust into the background to make space for a kind of technocratic pragmatism. “Europe
must work” – in a twofold sense: on the basis of effective and democratic structures and
in the sense of European political initiatives that are visibly geared to tackling the social
problems besetting Europe’s societies.
Foreign-policy challenges
While foreign and defense policy continue to be among the core tasks of national
governments, in recent years the EU has also left its mark on international terrain.
This includes above all its transformation and integration policy vis-à-vis East-Central
and Southeast Europe, but also its military and police missions, its greater diplomatic
weight in international forums, and its role as Europe’s largest donor in development
policy and its most important actor in international relations, advocating a clear-cut
multilateralism. 46
The EU’s most powerful and most successful foreign-policy instrument is enlargement.
The “lure of membership” (Robert Cooper) has helped to democratize the East-
Central European countries that have now become member states, to pacify and stabilize
the Balkans, and to induce Turkey to alter its administration of justice and initiate economic
reforms. The accession process and the “Copenhagen Criteria” have given the EU
46 Christos Katsioulis/Gero Maaß, European integration: Prospects for the future as a security
and welfare union, Compass 2020, Friedrich-Ebert-Stiftung, Berlin, 2007.
263

a set of potent instruments that it can use to gain fundamental infl uence over developments
in its neighboring countries, thus enabling it to contribute to security and stability
in its immediate environment.
Despite this all in all successful balance, the EU’s enlargement policy is today more
controversial than ever. While the European public has on the whole voted narrowly for
EU enlargement, support in some of the old member states is declining. An EU extended
to the east is increasingly perceived as a threat to jobs and prosperity, a fact that has
found succinct expression in the – already proverbial – “German angst” concerning the
Polish plumber. And the case of Turkey has led to a nervous debate on the EU’s nature,
cultural barriers, and boundaries.
The question of the EU’s boundaries has turned out to be a central aspect of Europe’s
foreign and security policy. Within the EU’s boundaries we fi nd countries that
are – despite obvious differences – rooted in the same modern democratic capitalist system,
while outside them we fi nd countries that function on other principles. For many
EU member states, the countries of southeastern and eastern Europe radiate a vague
insecurity – in part because of their lack of adequate legal frameworks and investment
conditions, in part on account of their (seemingly outmoded) clientist political and
social structures, and not least because of their weak economies. Keywords such as “illegal
migrant workers”, “traffi cking in human organs”, “organized crime”, and “forced
prostitution” tend immediately call to mind the eastern borders of the European Union.
This situation is aggravated by the many and various unresolved confl icts there – from
Kosovo’s status through the question of the state in Bosnia and Herzegovina, 47 to the
tensions between Moldavia and Transnistria and the war in Chechnya, which tend to
augment many EU citizens’ sense of uncertainty. Asked what it intends to do in such
cases, the EU fi nds itself in a dilemma. On the one hand, it could duplicate the current
strategy, namely to mitigate the confl icts and uncertainties in a given region by absorbing
its countries into the EU – although at present both the EU’s current internal crisis
and the ongoing crises in the regions in question appear too great. The sole exception
here is the Southeast Central European countries to which long-term EU commitments
have given clear accession prospects, although their accession seems to be receding
further and further into the future. On the other hand, it could seek to protect itself
from these countries along its eastern borders, seal itself off from them, so to speak
– but this is probably not a viable option, not least because of the existing economic cooperation
projects there, not to mention the close relations of some EU member states
to their neighbors beyond the border. 48
Against this background – that is, faced with the question of how best to achieve rapprochement
with these countries in political, economic, and social terms without offering
them membership – the EU developed its “European Neighbourhood Policy” (ENP) in
2002. Initially conceived with only the countries to the east of the EU in mind, the policy
was, under pressure from the southern EU countries, enlarged to include a number of
southern Mediterranean countries, and now the ENP embraces, in addition to Armenia,
Azerbaijan, Belarus, Georgia, Moldavia, and Ukraine in the east, Algeria, Egypt, Israel,
47 Britta Joerißen, The Balkans: On war, peace and Europe, Compass 2020, Friedrich-Ebert-
Stiftung, Berlin, 2007.
48 Michael Ehrke, The European Union and the post-communist sphere: Integration, European
neighbourhood policy and strategic partnership, Compass 2020, Friedrich-Ebert-Stiftung, Berlin,
2007.
264

Jordan, Lebanon, Libya, Morocco, the Palestinian Authority, Syria, and Tunisia to the
south. The EU has developed a separate “strategic partnership” for Russia.
The EU uses ENP in pursuit of its aim of strengthening “prosperity, stability, and security”
in the countries named above, though the focus is clearly on the EU’s security interests.
In this connection, the Council concludes that “[p]olitical instability and weak governance
in our neighbourhood could impact on the EU”, 49 and that ENP should be further expanded,
“especially … considering the potentially high long-term costs of failing to support our
neighbours”. 50 And yet the confl icts of interest between the EU and the ENP countries
are becoming clearer by the day, with the latter focusing above all on access to fi nancial
aids and to the single European market. But the EU’s initial hope that the incentives it has
provided would set political reforms in motion in the ENP countries has not (yet) materialized.
It appears that the incentives are not attractive enough. In East-Central Europe and in
South Europe the strategy has worked, but it now appears that it is simply not suffi cient to
apply EU enlargement policy without its greatest incentive, namely EU membership, in order
to achieve the desired political and social transformation in the ENP countries. One of
the greatest foreign-policy challenges currently facing the European Union is development
of a clear and effective concept for the EU’s external boundaries, one that creates a balance
not only between “prosperity, stability, and security”, but also between EU incentives for
and demands on its neighbors with a view to resolving the existing confl icts of interest by
political means. But the approach currently in use – namely to offer a package of bilateral
action plans instead of pursuing a strategy keyed to the special features of the regions concerned
– works counter to this end. Moreover, these ultimately very different regions are to
remain gathered under the ENP umbrella.
It is not only since 2001, or 2004, that security has ranged high on the agenda. Since
the Council meetings in Cologne and Helsinki in 1999, European Security and Defence
Policy (ESDP) has been regarded as part of the Common Foreign and Security Policy.
ESDP was touted as the project of the decade, and it was supposed to give new momentum
and political contours to European integration and develop an attractiveness comparable
to that of economic integration in the golden 1980s, the era of “Europhoria”. In fact,
security policy has become – not least in the wake of an intensifi ed debate on security
policy and under the pressure generated by international crises – one of the European
Union’s more dynamic fi elds, though one in which there is a wide gap between expectations
and (feasible) practice. Long justifi ed less in terms of security policy than with reference
to integration and foreign policy, ESDP was given a stronger strategic component
when the European Security Strategy (ESS) was adopted in 2003. Vaguely formulated in
many places, the ESS paper still manages to outline – in ways setting it off from the US
– the contours of a European approach to security policy. While it is true that, based on
an expanded conception of security, Europe – the “civilian power with teeth” (Frank-Walter
Steinmeier) – also relies on military means, the strategy provides mainly for the use
of a set of integrated economic, civil, and police instruments. Embedded in an “effective
multilateralism”, the strategy propagates the export of “responsible government” as a
value and focuses on the regional and international structures that cause confl ict, instead
of being centered on rogue states.
49 Meeting of the Council (General Affairs and External Relations) on 18/19 June 2007, http://
www.eu2007.de/en/News/download_docs/Juni/ 0628ENP/ENP_en07.pdf
50 50] Ibid.
265

But while the institutional, technocratic structure of ESDP has made rapid progress in
terms of early warning, analysis, decision-making, and planning, a number of core political
questions are still unresolved and continue to be highly controversial among the member
states. When, where, and with what means should the EU engage in the fi eld of security?
Of what nature is the relationship between ESDP and NATO and the United Nations, and
how is Europe dealing with US misgivings? How does the policy defi ne the relationship between
military and civil means? What measures are provided to ensure ESDP’s democratic
legitimacy and ability to act? Are the member states prepared to mobilize the resources
needed to develop ESDP and to advance the transformation of security structures in the
countries themselves? So far, no strategic consensus has emerged on these questions, but
without it an alternative European security concept remains a chimera.
266
V.2 The G-1
Far more than any other country, the US will continue to determine developments in
international relations in the years to come. The US is by far the world’s greatest military
power, it has the world’s largest and – compared to the other industrialized countries
– most dynamic economy, it is the world’s laboratory, its culture is globally present, and
it has institutionally anchored veto powers in all important international organizations.
But whether and to what extent many of the global and German goals outlined above are
in fact reached will depend on the ups and downs of cooperation with the “indispensable
nation” (Madeleine Albright).
Based on Lord Ismay’s three necessities – “keeping the Russians out, the Germans
down and the Americans in” – and with Europe as the center of the bipolar confrontation,
it must be said in retrospect that the transatlantic relationship functioned quite
smoothly during the Cold War, despite periodic crises. In recent years, however, transatlantic
differences have become more pronounced. While the Iraq war has deepened
the divide between Europe and the US, cracks in the Western alliance had been visible
for some time. Still, the governments on both sides of the Atlantic have managed again
and again to develop joint positions on important issues of international politics. However,
the Landmines Convention, the International Criminal Court, the Biodiversity Convention,
and the Kyoto Protocol are telling examples of a “multilateralism minus one”,
though one that has remained limited in its effects. As far as issues related to reform of
the international fi nancial markets are concerned, there has been no progress for years
now because of the US’s skeptical stance. And a certain mutual mistrust has grown over
security policy, human rights, the relationship between religion and politics, and fair
burden-sharing in the transatlantic partnership.
The character and causes of the present crisis are controversial, however, and the
signals from both sides of the Atlantic contradictory. There have been calls for prudence
from those who see nothing new in this crisis discourse, since, as they claim, the rhetoric
of trade war and the growing estrangement of the transatlantic partners has long been
part of the political discourse – and criticism is simply part of the natural process of
change within transatlantic relations.
While poor policy management and a lack of openness to the sensibilities of the other
side, it is further argued, caused a surge of irritation as the Iraq war got under way, the
situation is now gradually returning to normal.

Thanks to the density of EU–US relations below the political level, the crisis did not
escalate into a transatlantic cold war: the transatlantic economy – the most stable area of
transatlantic relations and the one with the highest level of coordination and networking
– was not affected by the dispute. Transatlantic social and civil society contacts are
robust, and, despite what is often claimed, the populations of the US and the EU are
largely in agreement when it comes to their analysis of threat perceptions and their positive
assessment of the United Nations, arms control, international environmental policy,
or development aid. Nor are Americans and Europeans far apart in how they view international
challenges.
But when it comes to the transatlantic security partnership and – more generally – to
issues bound up with the present world order, the causes of the dispute seem not to be
merely questions of style. It is here that the loss of the “external federator”, the common
enemy, has made most clearly manifest the end of what was so long taken for granted in
transatlantic relations. As a characterization of the differences in thinking between the
US and the EU, we may regard Robert Kagan’s depiction of the American Mars and the
European Venus as oversimplifi ed, and the conclusions he draws as wrongheaded. But it
cannot be denied that the confl ict over the different US and European visions of international
politics are due to the huge (military) power differential between the US and the
EU, as well as to fundamental differences in their security cultures. While the American
side increasingly perceives institutional arrangements as fetters and has therefore opted
more for unilateral action and an attempt to use a robust military and intervention policy
to prolong its world political hegemony, Europe is pointing to the rapid depletion of a logic
based purely on power and has opted for multipolarity, balance, and multilateralism.
Today, broad segments of the US elite see in Europe a community calling for more
of a voice in the decisions made by its US ally, but without at the same time being willing
to shoulder (military) responsibility and international obligations. Instead of looking
threats straight in the eye, it is claimed, Europe is timid and hesitant, loses sight of the big
picture amidst rules and negotiations, and yet slipstreams in the US’s regulatory policy
wake. In other words, it is precisely what Europe regards as its political strengths that are
interpreted here as weakness.
Europe in turn looks anxiously across the Atlantic. The US and Europe have grown
apart, and the arrogance of power lies at the root of it. For Europe, the US is all too
quick to opt for military force and all too reluctant to use its civil power; the US thinks
in friend–foe categories, demands loyalty, and yet is unwilling to engage in dialogue and
cooperation; the US too often exempts itself from jointly adopted rules to be effectively
integrated into multilateral efforts. “The US’s normative authority is in ruins”, as Jürgen
Habermas has put it. One look at Kabul and Baghdad, years after “Mission Accomplished”,
appears to confi rm this. In the end, the Europeans fear for their own development
perspectives (for example, in the framework of ESDP) in the face of a great-power
USA that permits itself to determine on its own what or who stands for Europe (old or
new Europe?) and is in a position to drive a wedge between its own allies.
Nor is the situation much better with NATO, the core institution of the transatlantic
partnership. The eager acquisition of new members, the call for alliance action, and the
ongoing NATO missions (the alliance remains the only military “subcontractor” able to
carry out a wide range of missions effectively) cannot conceal the fact that the present
transatlantic dissent has eliminated the basis that NATO needs to fulfi ll its political function,
that is, to effectively work out and implement joint “Western” security strategies.
267

The loss of a shared threat perception has led to a “security dilemma in alliance politics”
(Glenn Snyder); in the dispute over its future (global?) orientation, the alliance has the
outward appearance of being badly unsettled; and its relevance is increasingly open to
doubt. This is also shown by the striking decline in public support for NATO in countries
such as Italy, Poland, Turkey, and Germany, which have traditionally been among its
chief proponents.
Perhaps a Democratic win in the upcoming US presidential election would go some
way toward calming frayed nerves. But the security environment has changed so drastically,
and differences of opinion in the alliance appear to be so structural and deep that a
mere change of administration in Washington would probably not suffi ce to reconstruct
the Western alliance on the old basis. The relationship between EU, NATO, and US must
be redefi ned.
What’s so bad about being Venus?
In the years to come, too, the major disagreements between the EU and the US will be
played out in the fi eld of security policy. This is unlikely to shake the transatlantic marketplace
to its foundations. The crucial factors at work here include internal economic
developments and China’s role. The two most important transatlantic “domestic” economic
issues that will infl uence the future of US–European economic relations are the
implementation of the Lisbon Strategy on the European side and reduction of the budget
defi cit on the US side. A generally cooperative transatlantic tone could have a benefi cial
effect on efforts to shape the world economy in the framework of trade and fi nancial
policy, though without being of crucial importance.
The divide could widen over security policy. The growing transatlantic estrangement
is best illustrated by sensitive, though at the same time decisive, issues of international
politics – approaches to China, Russia, and the Middle East, as well as the fi ght against
terror. A number of European countries increasingly view the US as the Other, seizing
on this impulse to further expand ESDP. The cracks are supposedly to be found in NATO
as well, and they are a sure sign that the alliance is becoming an arena for protracted
transatlantic confl icts. An EU reduced to its core dimensions and integrated under a
common security policy would have no room for US ideas on a NATO with global reach
because this would entail a deterioration of relations with Russia. The US is more likely
look around for more fl exible security partnerships (coalitions of the willing), cherrypicking
among the countries of Europe. It is further argued that this partition of Europe
into (in the US view) supporters and rejectionists (Stanley Hoffmann) is likely to prevent
Europe’s security policy from developing fully. NATO is on its way to becoming a relic of
the Cold War, an alliance that still discusses security issues, but with no real willingness
to seek compromise or prospects of action.
If the US consolidates its preeminence, the logic of power remains in place, the (military-)technological
gap continues to grow, and no real progress is made on a joint security
policy (leaving important countries such as the UK out in the cold), then it is entirely
possible to imagine the development of an even more “Americanized” NATO. All that
would be needed is a unifying threat scenario: perhaps Russia in the throes of crisis or a
more manifest clash of civilizations; perhaps an insight on the part of Europe – induced
perhaps by the failure of efforts to integrate Europe – that NATO is in fact the only organization
capable of reliably carrying out a broad range of missions. In political terms,
NATO is threatened with becoming a body of loyal followers in which the US lines up
268

consent for its security strategies; in military terms, it is in danger of being used, fl exibly
and globally and under US leadership, to contain international security risks.
One medium-term option would appear to be a soft separation between Europe and
the US, but one that would not rule out friendship within the framework of a minimum
Atlanticism – without the exclusiveness typical of the postwar era. The US’s military
course is visibly running up against rooted in fi nancial, organizational, and legitimacy
factors. And in the long run the US’s unipolar pretensions and aggressive power politics
will not go over well with China as the creditor expected to pay for it. The recent case of
North Korea clearly shows that diplomatic means still have some prospect of success.
Other examples – for example, Iran – could be added.
Nevertheless, different threat scenarios continue to be drafted on both sides of the
Atlantic, and while the US seeks security in technological development and conversion
of its weapons systems, Europe is investing in instruments designed to prevent crises,
contribute to state-building, and reconstruct confl ict-torn societies (civil and military crisis-response
forces, police operations, development policy, economic programs). In the
best case this will lead to a balancing out of existing antagonisms in the two security
strategies, recognition of the other side’s capacities, and a deepening of the international
division of labor in the fi eld of security policy. As among the ancient gods, Mars and Venus
would fi nd each other once again – for a time. This would mean undertaking greater
efforts to get China and Russia involved. This would require the EU to continue to hone
its security conception and to advocate it assertively and in unison, doing more to focus
and integrate its security resources and to induce the UK to become involved. In the US,
in turn, the view that a strong Europe is good for the US would have to reassert itself, as
well as a more pragmatic course in foreign policy.
But this harmonious form of division of labor would stand and fall with the institutional
framework used to negotiate the different US and European views on concrete
confl icts and to adopt and implement joint strategies. This would be possible only in a
NATO whose European pillar had been substantially strengthened. There would be two
ways of doing this: the US could give Europe more voice – either in recognition of the
fact that the US is reliant on Europe’s capacities in resolving confl icts or at least to delay
development of the ESDP. It is more likely, however, that the EU will itself have to initiate
a Europeanization of the alliance by speaking with one voice, namely with more coherence
than hitherto, so consolidating its position within NATO. This may mean that in
future, NATO, a supplier of collective security goods, will be deployed more on Europe’s
periphery, while the US will seek other, more fl exible security partnerships.
Transatlantic perspectives
The diagnosis – close economic integration, the central institution in crisis, decline
of the collective identity on which mutual relations are based – shows that while there
is still common ground in today’s transatlantic relations, there is no way back to the old
and familiar roles. A new transatlantic bargain is needed to fi ll the void left behind by the
decline of the once frequently invoked community of values. As far as many global issues
are concerned, the US is the key, and a permanent deterioration of relations could make
it diffi cult or even impossible for Germany and Europe to reach their foreign-policy aims.
At the same time, the price Europe would have to pay if it fell into line with the present
US course would be a surrender of its own, clearly stated principles of cooperation and
multilateralism. There will be no easy way out of this dilemma. The European Union it-
269

self will be faced with the diffi cult task of redefi ning its relationship to the US, a process
that will at the same time raise a number of internal European questions.
One fi rst step might be to place US–EU relations on a more stable footing outside the
fi eld of security policy. It would be possible in the medium term to develop projects focusing
above all on energy issues and climate protection, world trade, and economic cooperation
for the Middle East, conceived as a contribution to reaching a peace settlement in the
region. But even a continuing phase of easing tensions will not be enough to restore transatlantic
relations to the exclusivity they once enjoyed. Both regions are also developing
intensive bilateral relations with other countries, and these in turn affect the relationship
between the US and Europe. It would be particularly important to do more to make relations
with Russia (but also with China) an important part of transatlantic consultations. An
enlargement of transatlantic cooperation to include Canada (and Mexico) would pave the
way to gaining a new mediator for diffi cult issues bearing on transatlantic relations. 51
In future, security policy will remain the most delicate fi eld of transatlantic relations. In
the coming years it will virtually impossible for the EU to attain its security goals without
the US, and certainly not against it. However, general attempts to tie European foreign
policy to the policy pursued by the US (as the UK has sought to do) have proven every bit
as unsuccessful as attempts to establish Europe as a countervailing power, an idea that is
generally rejected within Europe. At the same time, the only way to stabilize transatlantic
relations in the long run would be for Europe to enhance its organization – with a view both
to showing more coherence in its role as partner and to closing Europe’s gates to American
cherry-picking. Progress here will be gradual because Washington would be unwilling to
accept any formal restructuring of NATO on the basis of a two-pillar model and because
the idea would have little prospect of fi nding consensus among the EU member states. If
it strengthened CFSP and stepped up efforts to focus its resources, Europe would have a
more audible voice in transatlantic bilateralism. More transparency as regards ESDP objectives
could in turn help to prevent irritations on the US side.
270
V.3 Our friends and neighbors …
There is every indication that in the years ahead a number of regions around the European
Union will be faced with a very diffi cult process of change and transformation; its
outcome is entirely open, and it is certain to have an impact on Europe. The situation is
tangled and very diffi cult: the growing pace and reach of economic globalization; rising
demand for energy; ethnic tensions and confl icts at the seams of the world religions (the
preferred playgrounds of major powers); fragile democracies and authoritarian regimes;
social polarization; a “moody bear” to the east; and the world’s powder keg to the south
– all this adds up to a fairly problematic picture. If the impact on Europe is to be minimized
and the causes of these risks tackled, Europe must also develop strategies for and
with its more distant neighbors.
A seismic confl ict region
Edgar Morin refers to the Middle East as a seismic point where all confl icts are played
out at the same time: the dispute between religions and the confl icts between religion
and secularism, democracy and autocracy, poor and rich, and aging societies and general
51 Almut Wieland-Karimi, Transatlantic relations: Together the West is exploring new shores,
Compass 2020, Friedrich-Ebert-Stiftung, Berlin, 2007.

overpopulation. Like no other region, the Middle East is characterized by classic territorial
and hegemonic confl ict formations; these would include above all the Israeli–Arab
confl ict, the Iraq confl ict, the Shiite–Sunni confl ict, and the dispute over the Iranian nuclear
program. Whether or not these confl icts are resolved will determine whether the
crisis of the “blocked regions” will deepen in the coming years or some fi rst, halting steps
will be taken towards political and social consolidation.
The Arab–Israeli confl ict is a fundamental one that is not only crucial for Israel and
Palestine but also leaves its traces in the other Arab countries, as well as in relations
within the Arab world. The security situation in the Gulf region was long shaped by the
hegemonic confl ict between Iraq and Iran. The most recent Iraq war has altered the security
perception of the Gulf states, and while Iraq no longer poses a direct military threat,
its instability is generating new dangers. Not only has the Shiite takeover of power in
Iraq intensifi ed Sunni extremism, but growing Shiite power also strengthens the hand of
Shiite communities in Saudi Arabia and Kuwait, and it could contribute to further destabilizing
these countries. Iraq’s weakness at the same time means that there is no longer
a strategic counterweight to Iran. Surrounded by a hostile US and rivals such as Turkey,
Pakistan, and Saudi Arabia, and increasingly dependent on less than reliable partners
such as Russia, Iran, in its isolation, is seeking to play a more active role in the region.
It can base its activities on rent-type revenues from its oil and gas reserves, its infl uence
over Shiite factions, and a strongly developed national consciousness. Moreover, the protracted
US occupation of Iraq is not only exacerbating tensions with Iran, but at the same
time creating further domestic pressure on the regimes in the Gulf region. The political
reform process is making little headway, above all in Saudi Arabia, the region’s most conservative
and infl uential country. The leadership of some of the region’s monarchies is in
the process of change, and the pro-American line pursued by a number of governments
is fuelling extremist groups and the political instability of a number of regimes. The escalation
of the dispute over the Iranian nuclear program also shows how far the “West” and
the Islamic countries have already drifted apart and how diffi cult it is to integrate Iran
without at the same time coming up with a political settlement in the region.
Nearly all the countries in the region are faced with severe internal social and political
challenges. A large number of distortions are further destabilizing these countries
– a development viewed with alarm not least by Israel in respect of a number of
countries that are more or less well disposed toward it. As far as their key economic
and social data are concerned, the countries in the region rank low on cross-county
comparisons. With the exception of the energy sector, the region is very weakly integrated
into global markets, and it depends above all on rent-type revenues from oil and
gas; there is virtually no cooperation in the region itself. Its societies are among the
most illiberal in the world. Unemployment, above all among young men, is very high
and is expected to continue to mount in the years to come – fuelled by a demographic
development that, in contrast to other global trends, gives reason to expect marked
population growth in the region. Moreover, more than in any other region of the world,
(cultural) globalization is perceived in the Arab world as a threat, and it is polarizing
the region’s societies. We can identify a certain “cultural leveling” in the region due to
the opening up in which several of its countries are engaged, as well as the dissemination
of new means of communication and the emergence – for example, in Iran – of
a secularized middle class. This goes hand in hand, however, with a need for cultural
autonomy on the part of other segments of society, which – given a politically more
271

aggressive twist – is used by numerous groups against the threat of a US-led “Western
cultural and value imperialism” that, camoufl aged as universalism, allegedly threatens
the region’s autonomy. This translates into a growing risk that – in addition to the
region’s traditional confl icts – we could, in the years ahead, see a further escalation of
internal confl icts that (especially in view of the weapons stockpiled in the region) could
quickly assume military character.
Given the close interrelatedness of these numerous confl icts, regional crises could
be defused only if their root causes were addressed at the same time. This Herculean
task is scarcely to be accomplished without an overall concept supported by the most
important international actors. 52 The tasks and approaches that a concept of this kind
must comprise are so many and various that they hardly seem manageable. The window
of opportunity for a two-state solution, without which the region’s core confl ict cannot
be resolved, is closing due to the region’s demographic development and Israel’s settlement
policy. In other words, the time has come to launch the fi nal status negotiations.
In view of the rule of three widely subscribed to in the Arab world – “No war without
Egypt, no peace without Syria, and no agreements without Saudi Arabia” 53 – the task
would be to get these countries solidly involved in the ongoing initiatives, and not to
isolate them; not least in view of the need to stabilize Lebanon and Iraq. It will be virtually
impossible for Iran to play a constructive role in the region without a solution
in the nuclear dispute. And without better socioeconomic development, distributive
justice, and political freedoms, the region’s societies are unlikely to settle down. There
are already a number of initiatives, but they need to be better coordinated. There is
little demand in the target countries for approaches such as the WEU’s Mediterranean
Initiative, the OSCE’s Mediterranean Dialogue, or the NATO Mediterranean Dialogue;
and the Barcelona Process will lead to an (artifi cial) separation from the region of the
countries bordering directly on the Mediterranean. It would make sense to harmonize
the European initiatives to form an overall concept and to better dovetail the EU’s
neighborhood policy with its relations with the other countries of the region. The Middle
East Quartet – possibly broadened to include China – should be upgraded politically
and turn its attention to other core confl icts in the region besides the Arab–Israeli
confl ict, such as the nuclear dispute with Iran or the issue of Iraq. The revitalization of
a comprehensive Middle East peace process would have to be embedded in a regional
initiative designed to promote disarmament and efforts to reduce tension, one formulated
and acted on in the region itself and moderated by external actors – including
Turkey – and designed to pave the way for dialogue between the region’s countries and
societies. One crucial factor will be whether and to what extent it proves possible to get
the integration-minded segments of Islamic movements involved, particularly when
it comes to issues such as respect for democratic rule and renunciation of violence.
Thanks to its economic infl uence, the role it plays in the EU and the international
organizations, and its generally stable and good relations with most of the important
actors in the region, be it Israel or Iran, the US or China, Germany will be in a good
position, in the coming years, to make an important contribution to forming the political
nets that would support an overall concept for the Middle East.
52 Andrä Gärber, The Middle East and North Africa: A gridlocked region at a crossroads, Compass
2020, Friedrich-Ebert-Stiftung, Berlin, 2007.
53 Ibid.
272

A new Silk Road?
Developments in Europe’s Eurasian neighborhood are also fueling European uncertainties
about the stability of some of its neighbors. While a number of border confl icts have
been settled in Central Asia in recent years (for example, between Kazakhstan and Turkmenistan,
Uzbekistan and Kyrgyzstan) borders in the region, artifi cially drawn under the
Soviet Union, continue to be a cause of confl ict. These borders cut through economically
coherent areas, transportation routes, and water resources, creating strong minorities in
all Central Asian countries. The growing scarcity of land and water in the region could
cause these confl icts to escalate. Toxic salts from the shrinking Aral Sea have turned parts
of Uzbekistan, Kazakhstan, and Turkmenistan into a contaminated ecological crisis region
that is home to 20 million people. Following the breakup of the Soviet Union, Central Asia
has moved closer to its neighbors to the south, and thus to their problems as well. Since
the 1999 attacks in Tashkent, the problem of terrorism and the infi ltration of radical Islamists
from neighboring countries have topped the region’s security agenda. In Afghanistan’s
shadow, Central Asia remains an important transit region for the drugs trade. Thanks to its
infrastructure (research reactors, scientists) and its uranium reserves – Kazakhstan possess
one quarter of the world’s uranium reserves, and Kyrgyzstan and Uzbekistan are among
the world’s leading producers of low enriched uranium – Central Asia is also a sensitive
region when it comes to the issue of proliferation.
All the Central Asian countries have substantial and strategically important deposits
of raw materials: Turkmenistan, for example, has the world’s fourth largest natural gas
reserves and Kazakhstan possesses oil, gas, and various mineral resources, few of which
have been tapped. The breakdown of the Soviet Union left these countries with dramatically
shrinking economies, a development that constituted a severe strain on the region’s
societies in the context of their newly acquired national independence. Thanks to their
natural resources, Kazakhstan, Uzbekistan, and Turkmenistan today enjoy high grow
rates, while, for example, Tajikistan’s economy continues to falter, with the country now
listed as a “least developed country”. One thing that all the region’s countries have in
common is that their internal social disparities are on the increase. Like the Middle East,
the Central Asian republics have high rates of population growth, and the large number
of young unemployed men there could become a destabilizing factor, particularly in connection
with the harsh methods used by the region’s governments against Islamic tendencies,
an approach that will favor the rise of revolutionary religious movements. Domestically,
the Central Asian governments are no match for the confl ict potentials they
face. The region’s defective democratic structures and openly autocratic regimes have
– as the recent unrest in Kyrgyzstan and Uzbekistan has shown – considerable destabilization
potential. It is likely that the political picture of the Central Asian republics will be
colored by a marked nationalism, as well as by the spread of political Islam.
Both Central Asia and the South Caucasus, torn as it is by ethnic confl icts, civil wars,
and separatist movements, serve their region’s large neighbors as arenas in which to play
out their various interests. Apart from its abundant natural resources, Central Asia’s central
geographic location is an important factor here. Russia is interested in intensifying
its North–South relations with India and Iran; Europe is seeking to revitalize the ancient
Silk Road, which led across the Black Sea, the South Caucasus, and today’s Central Asian
republics. The South Caucasus is seen in Europe above all as an alternative route for energy
imports from the Central Asian republics that would reduce Europe’s dependence
on Russia. Along with South Asia and Southeast Asia, the Caucasus and parts of Central
273

Asia are involved in US anti-terrorism strategies. Russia and China – which fears that
religious and separatist movements might spread to its eastern provinces – are seeking to
use the Shanghai Cooperation Organization, whose members also include Kazakhstan,
Kyrgyzstan, Tajikistan, and Uzbekistan, as a forum to articulate their interests in the
region. Originally founded to improve border security between the former Soviet republics
and China, the organization has also come to be seen – in light of NATO’s eastward
expansion and a renewed US–Japanese security alliance – as a strategic counterweight to
US dominance in Central Asia.
While the EU was only lightly engaged there in the 1990s, in 2007 it responded to the
region’s growing role in world politics and energy policy by developing a new Central
Asia Strategy. European interests are focused on the need to stabilize Central Asia in political
and social terms, which is seen as a precondition for stabilizing Afghanistan. The
strategy’s components include regional security issues, efforts to combat drug traffi cking
and terrorism, cooperation projects in the fi eld of education and on the development of
an “e-Silk Road”, and further development of the rule of law, human rights, and democratization.
The cooperation is also set to focus on improving the region’s desperate environmental
situation – the water issue in particular is seen as a potential cause of confl ict.
Finally, the EU is also interested in diversifying its energy suppliers and the transit routes
they use. At present it is unclear how the EU intends to weight and link the various objectives
of the other major actors in the region, which tend to diverge substantially. While
the US would like to see Central Asia move closer to South Asia with a view to seeing
Afghanistan supplied with energy, Russia is seeking – successfully – to tie the region
to the north. In recent years the US has lost some of its infl uence in the region, and the
producing countries see the Russian pipeline as the only option that can guarantee that
Central Asian oil and gas can be exported without friction. Whether or not the new EU
strategy will be able to bridge the contradictory approaches pursued in the region – European/German
energy imports via Russia on the one hand, stabilization of Afghanistan
on the other – remains an open question. 54 There is a risk that human rights protection
and promotion of democracy could fall by the wayside in a situation marked by a growing
lack of security of supply, mounting concern about Russia’s development, and the lack of
freedom in most Central Asian societies. In view of its lack of real infl uence on the social
development of the countries concerned, but also of the tough competition it faces from
China and Russia, which do not condition energy cooperation on political reforms, the
EU will fi nd it very diffi cult to induce its new partners to shoulder obligations. The “strategic
partnership” with the Russian Federation illustrates these diffi culties very clearly.
A moody bear?
After years of depression that saw the “stranded world power” (Dmitri Trenin) in political
free fall and struggling to overcome a period of social and economic instability that
swept away the certainties of the old Soviet Union, Russia has today regained a measure
of economic stability and become politically more self-assured. This is due to the country’s
dynamic economic development in recent years, which has brought growth rates of
between 6.5 and 7.5%, mostly thanks to the world’s booming energy markets. In recent
years Russia, with its vast oil and – above all – gas reserves, has become the world’s en-
54 Reinhard Krumm, Central Asia: The struggle for power, energy and human rights, Compass
2020, Friedrich-Ebert-Stiftung, Berlin, 2007.
274

ergy pump. Today Russia is the world’s biggest energy exporter. At the same time, since
the 1998 fi nancial crisis it has pursued a stable fi scal and monetary policy. Wages in
Russia have risen at rates in excess of infl ation and are usually paid on time; Russia has
repaid its debts and now holds sizable currency reserves. But whether this path of economic
development will prove sustainable is still an open question. While Russia, which
is counted among the so-called BRIC countries, is expected to have a gross national product
larger than Italy’s and France’s by 2025, the obstacles to realizing this optimistic
estimate are clearly visible. As in other countries, huge profi ts from Russia’s extractive
industries have led the country’s leadership to neglect the need to diversify its economic
structure. Russia’s domestic industrial sectors, above all chemicals and mechanical engineering,
are under severe pressure to adjust. Thus far, Russian markets have not proven
particularly interesting for foreign direct investment. Russia will have to invest some 700
billion dollars in the energy sector if it is to avoid production shortfalls, develop new
fi elds, and enlarge its refi nery and transportation capacities. It will be able to mobilize
these huge sums only if it opens up the national economy and seeks better integration
into the world economy, develops an effi cient banking sector, and improves its economic
legislation. While at present Moscow seems to have opted more for stronger state control
of its strategic economic sectors, a basic confl ict is emerging in the Russian economy:
between the political attempt to protect and insulate important economic sectors from
the impacts of the market and the need to further open up other industries to the world
market. This confl ict will be further fueled by the Russian government’s resource-oriented
foreign policy on the one hand, and on the other by the mounting liberalization
pressure created by the need to attract more foreign direct investment, the slow pace at
which a middle class is developing, a growing group of trained managers, and the country’s
upcoming accession to the WTO. “Asian” solutions that buy partial opening at the
price of protection for certain industrial sectors are likely to emerge in the coming years.
A dramatic break in Russia’s demographic development, further accentuated by one of
the world’s highest HIV infection rates, constitutes another economic problem for the
country – but also a social problem. Beginning in 2008, Russia’s working-age population
will decline by at least one million per year, and at the same time Russia may fi nd itself
faced with a growing brain drain – sparked by unequal distribution – to the US, Europe,
and Israel. While a policy of controlled immigration, conceived above all with Russia’s
demographically strong neighbors in mind, could ease the situation, it would be diffi cult
to formulate in view of ongoing political confl icts with neighboring countries and ethnic
tensions and nationalist sentiments in Russia itself. And it is still too early to predict
how Russia’s young democracy will develop. What Moscow refers to as its “sovereign
democracy” (the companion to its “sovereign economy”) often turns out in practice to be
illiberal, with power being further centralized, the executive upgraded at the expense of
parliament, party pluralism obstructed, and the media and civil society reined in. This
“guided democracy” shows signs of conscious efforts to mark it off from “Western-style
democracy”, to pursue the idea of a special path for Russian society, and to ward off any
outside criticism of the domestic political situation in Russia.
The picture is similar when we turn to Russia’s foreign policy. While in the 1980s
Gorbachev used foreign policy as a lever for domestic reforms, today Russia’s domestic
policy determines its foreign policy. Following years of declining political and economic
power – in which Russia went, as Helmut Schmidt put it, from the status of a world
power to that of “an Upper Volta with missiles” – Russia’s self-confi dence in foreign pol-
275

icy has been gradually boosted by high energy prices, the country’s dynamic economic
development, and the growing weakness that the US infl icted on itself when it opted for
war in Iraq. Alongside its “sovereign economy” and “sovereign democracy”, Russia now
wishes to return to a “sovereign foreign policy”. The former “sick man of Eurasia”, long
at the mercy of globalization, is now pursuing a classic policy designed to achieve its
national interest, orientated towards sovereign decision-making, the creation of spheres
of interest, and a multipolar world order. In the early 1990s there were still expectations
that Russia would follow the European example and embark on a Western development
path. Today, based on a strict realpolitik, the Russian government is seeking to secure the
status quo. In dealing with the countries on the territory of the old Soviet Union, it uses a
carrot – for countries that work in favor of regime stability and do not openly oppose the
restoration of Russian power – and a stick (for example, supply restrictions, boycotts) for
countries given, say, to colored revolutions. It makes targeted use of separatist confl icts
in order to destabilize countries, and it vehemently defends – as in Chechnya – its territorial
integrity. Moreover, it judges international settlements in terms of whether they
are consistent with the principle of nonintervention and serve to protect the integrity of
the countries concerned; and it uses the rise of new powers to diversify its foreign policy.
The strategy assigns as much importance to the BRIC countries Iran and Turkey as it does
to cooperation with other resource-rich countries. This will not be a suffi cient basis for
a “special Eurasian path” for Russia, since no solid anti-Western alliance appears to be
emerging (to say nothing of one under Russian leadership) and Russia is not powerful
enough to go it alone. All the same, there is a danger that Russia’s foreign policy – encouraged
by diffi cult domestic transformation processes – might drift onto an increasingly
unpredictable seesaw course that would place further obstacles in the way of efforts
to develop stable international relations and improve global crisis management. 55
The prevailing conditions are anything but favorable for a close partnership with Russia.
While the Russian government is still offi cially committed to the policy of a fundamental
opening up to the West that was adopted in the early 1990s, the political style in
evidence has increasingly shifted from cooperative to confrontational. The list of controversies
between Russia and Europe and the US is a long one. It extends from Russia’s
iron-fi sted policies vis-à-vis some of its neighbors, a resource-oriented foreign policy and
a seemingly never-ending confl ict over NATO and the status of Kosovo, heavy-handed
treatment of civil society and the meat boycott imposed on Poland, to the disputes surrounding
the projected US antimissile shield, the termination of the CFE Treaty, and
the recent announcements concerning possible termination of the INF Treaty. Now that
the Russian charm offensive seems to be over, Putin’s Byzantinism has given the West
a frosty sense of unease, while Russia considers any European criticism of the state of
democracy and human rights in Russia as an act of aggression. There is controversy over
the causes and depth of the changes observed in (the style of) Russian foreign policy.
While some see this as a reaction to a deep disappointment at the West’s policies, the
growing rejection of Russia, and growing pressure from abroad, others see in Russia’s
more aggressive policies the clear-cut strategy of a government seeking to secure its power
at home by gaining more infl uence beyond the country’s borders.
Political ideas on how to deal with Russia are just as divergent. Those calling for a
harder course toward Russia for the most part also, pointing to a lack of shared values
55 Matthes Buhbe, The main features of a German strategy towards Russia, Compass 2020,
Friedrich-Ebert-Stiftung, Berlin, 2007.
276

and the extremely slow pace of progress on democratic and rule-of-law development,
see the concept of “rapprochement through integration” as a failure and are now calling
for more “realism” in European–Russian relations. This would include the demands that
Russia turn away from its present authoritarian course at home, that Europe show more
solidarity and unity in the face of Russian attempts to split the EU, and that Europe adopt
a more self-assured neighborhood and Central Asia policy, one that could – for example,
when it comes to the energy issue – be used to oppose Russia’s interests. Others see here
the risk that Russia might seek to isolate itself and turn its back on Europe. Despite a certain
disenchantment with what has been achieved so far, this group sees no alternative
to efforts to establish the closest possible ties between Russia and Europe on the basis of
increasingly dense integration.
As a cooperative and Europe-oriented partner, Russia would unquestionably have
much to contribute to the continent’s stability and prosperity. Russia has already become
“indispensable” again in global politics (Egon Bahr). Against or without Russia, there
will be no way to resolve the most pressing crises in Europe’s immediate neighborhood
– the status of Kosovo, the Middle East, the Iran nuclear issue – or to stabilize the eastern
European neighbor countries and achieve energy security in the short and medium term.
Russia will remain a moody partner in the years to come. Looking at developments in
Russia over the past 15 years, we must conclude that it is unlikely that the status quo will
simply continue. While this may mean a measure of uncertainty, it also opens up possibilities.
The instruments used for cooperation with Russia will have to be fl exible enough
to be able to bridge the present ice age, but also to take advantage of new opportunities
for closer cooperation when spring comes. A pragmatic approach that is not likely to fall
victim to Russian domestic politics is therefore required. This approach should reserve
the term “strategic” for the limited number of areas in which both sides have a real interest
in partnership, whereas at present there are few real prospects for a comprehensive
and institutionalized “strategic” partnership with Russia. In individual areas, however, it
would be important to work for, and continuously expand, relations with Russia that are
as closely knit as possible. There are good reasons to believe that – as in the case of other
politically diffi cult partnerships – economic cooperation, including energy policy, could
form a nucleus of relations that guarantees a minimum of stability in European–Russian
relations. While Moscow virtually never misses a chance to remind Europe of its dependence
on supplies of gas and oil from the “energy superpower”, the EU has a de facto
demand monopoly on Russian gas – at present all of Russia’s pipelines lead to the West
– and this gives it a strong negotiating position. Russia is just as interested in good buyers
as Europe is in having a reliable supplier. The lucrative European market remains tempting
for Russia, and at the same time, Russia will be unable to raise the modernization
investments needed by the Russian industrial and energy sectors without foreign direct
investment from Europe. If it is to conduct effective and targeted negotiations with Russia
and avoid the danger of a split, EU policy towards Russia needs to be put on a more
European footing and given the shape of a common strategy that enjoys the support of
skeptics and proponents alike. But pragmatism need not be understood to mean abandonment
of principles. The development of democracy, human rights, and the rule of law
in Russia should therefore not be beyond criticism. But rather than simply take global
note of authoritarian developments in Russia, it would make more sense to express precise
and targeted criticism of particular developments and at the same time to intensify
contacts with Russian civil society and Russia’s Europe-oriented intellectual elites.
277

278
V.4 New kids on the block – a new political geography?
The growing uncertainty over the coming new world order is also fueled by the rapid
economic rise of a number of emerging countries, whose economic growth is regarded
in the centers of today’s global capitalism with a mixture of fear and fascination. While
the advance of India, China, but also Brazil, into the core of the world’s leading economic
powers appears to shape the contours of a “new trade geography”, it is still unclear
whether the rising powers will leave discernible traces on the political map.
From economic strength to political infl uence?
A number of names for this group of countries are making the rounds: the “BRIC
group” (Brazil, India, Russia, China) – from a study issued by Goldman and Sachs – is
certainly the most prominent among them 56 (an “S” is often added for South Africa, and
the acronym BRICSAM was coined to include Mexico and the ASEAN countries as well).
These acronyms should not be allowed to cover up the fact that these countries differ considerably
in terms of their levels of economic development, their forms of government
and social models, and, generally, their infl uence on global politics. This even applies
to the four BRIC countries (to say nothing, at this point, of the larger groups). What we
fi nd here is increasingly diversifi ed economies (for example, China) as opposed to largely
resource-driven economies (for example, Russia); authoritarian systems as opposed to
pluralist democracies; and more nationally oriented economic development strategies as
opposed to more open economies. Looking at the larger groups of emerging countries,
we fi nd differences over trade policy (for example, concerning China’s role in Africa and
Latin America) or over the makeup of an enlarged UN Security Council, which appear to
indicate that at present there are few joint positions beyond an emphasis on development
concerns. Owing to their sheer size, the pace of their growth, and the degree of their integration
into the world economy, India and China are, among the countries concerned,
surely the only new “BRICs in the wall” capable of altering the basic patterns of global
politics and the global economy.
Despite this heterogeneity, we can identify a number of common development patterns
and features. For BRIC and Co., the starting point and fi rst criterion is a clear-cut
surge of economic development in the countries themselves, followed by a stronger position
in the regional and global economy, with every reason to believe that these countries
will continue to consolidate their position. Several macroeconomic scenarios today
indicate that (i) in the years to come the BRICSAM world will continue to post rates of
economic growth greater than those of the OECD world; (ii) by 2030 – and this is a conservative
estimate – the export volume of the BRICSAM group will exceed that posted by
the OECD; (iii) by 2016 China will have advanced to second place in the world economy,
with India moving into third place by 2032; and (iv) in less than 40 years the BRIC economies
will be larger than those of the G-6 (US, France, Germany, Italy, the UK, Japan) (calculated
on the basis of GDP/dollar). But development of this kind could be endangered
by any one of a number of factors: structural economic problems, ecological and social
problems, unstable fi nancial markets, protectionism in the US and Europe. Whether or
not globalization will take on an Asian face in the course of the next 20 years remains an
open question in view of these challenges.
56 Dominic Wilson/Roopa Purushothaman, Dreaming with BRICs: The Path to 2050, Goldman
and Sachs, Global Economic Papers, October 2003.

The economic rise of China, India, and Brazil has gone hand in hand with opening
up when it comes to foreign-policy issues. Russia, the “stranded world power”, is also
using its resource-oriented foreign policy to intervene more forcefully and self-assuredly
in world events. While, to cite an example, even two decades ago large parts of the globe
were largely terra incognita for Chinese diplomacy, today China – in search of export
markets and investors, but above all raw materials and energy – is forced to assert its
interests in regions in which it has traditionally had little strategic interest – including
Sub-Saharan Africa and, especially, the Middle East, where India is now moving to close
the gap on its Asian rival. The arriviste powers also appear to have rediscovered the regional
level as a political playing fi eld on which they can boost and legitimize their claim
to a voice in global affairs and push back the infl uence of other actors – above all the US.
Brazil, for example, has blocked the formation of a pan-American free trade area and
pushed for enlargement of MERCOSUR. But the line between cooperative involvement
and efforts to achieve hegemony, between the needs of a region and the aims of the leading
powers is a fi ne one. Brazil was the main reason why efforts to stabilize and enhance
the institutional design of MERCOSUR failed: it was unwilling to cede any sovereignty
in exchange for closer cooperation. And China’s regional engagement is viewed with a
distrustful eye by its less powerful neighbors. China, however, which in the past was
more skeptical toward regional cooperation, has recently begun to step up its cooperative
efforts with and in the Southeast Asian regional forums (ASEAN, ARF-ASEAM). By 2010
a free trade area is projected between China and ASEAN; it would include some two billion
people and thus be the world’s largest. In the Shanghai Cooperation Organization,
in turn, China, together with Russia, is seeking to forge regional ties with Central Asia.
That the project is directed not least against the US is shown by the fact that Iran has, on
China’s initiative, been given observer status.
Even against the grain of their regional engagement, several such countries have
launched new initiatives designed to better network their relations. Here too, the driving
force is economic cooperation, which is refl ected in a growing number of bilateral trade,
investment, and technology agreements between emerging countries, but also in regional
forums such as the China–Africa Cooperation Forum or the South American-Arab Summit,
which are concerned mainly with trade, energy, and raw materials issues. Since the
failure of the 2003 WTO summit in Cancún, the establishment of the G-20+ and an upturn
in cooperation among India, Brazil, and South Africa (IBSA) have meant that new Southern
groups are now represented in the global game, and these cooperation projects appear to
be both more institutionalized and more durable in nature. Unlike the approaches adopted
by earlier South–South cooperation projects, these alliances are concentrated on a limited
number of issues. 57 The G-20+, a group of emerging and developing countries that represent
over half the world’s population – including, among others, all the important countries
of the South (India, China, Brazil, Mexico, Indonesia, South Africa, Nigeria, and Egypt)
– is focused almost exclusively on agricultural issues, including, for example, US and EU
agricultural export subsidies, the opening of European and US markets, and protection for
national agrarian structures. More extensive proposals, such as one on the establishment
of a free trade area among the countries organized in the G-20+, have yet to be given concrete
shape. IBSA also initially focused on economic and trade issues (for example, trade
57 Thomas Manz, Allianzen und Gruppen im Global Governance System: Multilateralismus
zwischen partikularen Interessen und universellen Anforderungen, Internationale Politik und Gesellschaft,
Heft 2, 2007.
279

in generics, free trade between MERCOSUR and India, improvement of shipping and air
routes between these countries, approaches involving joint production of weapons, and, in
general terms, efforts aimed at giving a more development-friendly shape to the multilateral
fi nancial and trade system). But the alliance has also been broadened to include technology
cooperation (for example, on agrofuel production and space research) and security
arrangements (for example, support for enlargement of the permanent membership of the
UN Security Council). In ways similar to the G-20, IBSA is more an issue-oriented alliance
than a fi xed political bloc, but its canon of values, which explicitly includes democracy and
human rights, marks this alliance off from China, and IBSA also appears to be rather homogeneous
in its makeup. How resilient the fi rst shoots of a “South–South multilateralism”
will prove, whether they will continue to be properly tended, and whether the countries
involved will prove able to turn their economic rise to account in terms of growing political
infl uence are all matters that are diffi cult to judge at present. However, the challenges to
the present core countries of the global economy that are emerging together with the new
powers are clearly discernible even today.
Integration or countervailing power?
The rise of new economic powers affects some of Germany’s – itself a trading power –
fundamental interests. While it opens up new chances for new markets, it will also ratchet
up competition for markets and raw materials and increase the pressure for change in
global market institutions. The German Chamber of Commerce and Industry estimates
that as early as 2008 China could challenge Germany for its title of world export champion
(although German companies will be involved in roughly 50% of Chinese exports).
The new constellations have already forced the Western industrialized countries to deal
with a number of questions, in particular fi nancial, trade, and energy issues. Roughly the
same can be said of climate policy and a number of security issues. Whether and to what
extent the rising powers are integrated politically will determine the viability of multilateralism
in the years to come.
Those who still express concern are often referred to the example of Japan, whose
economic rise was accompanied by massive fears in Europe and the US before the country
was integrated, more or less smoothly, into the global (Western) economy. Unlike
Japan, however, which was already tied into security alliances with the US, the BRIC
countries largely move outside the Western institutional system. 58 It is likely to prove
more diffi cult for the existing institutions simply to absorb them. And some of these
countries’ relations with the US are proving diffi cult. Russia and China at least, but also
Brazil, are not always seen as like-minded countries in the clubs around Capitol Hill – although
a sense of uncertainty about US policy serves to unite all four BRIC countries. India
was long alarmed over Washington’s close cooperation with Pakistan; Brazil is unsure
about Latin America’s future role as regards the US; Russia sees itself cut off more and
more from decisions that affect its elementary interests; and China is unsure whether
its current good relations with the US are due only to the “war on terror”. There are still
no signs of the “Islamic-Confucian alliance” predicted by Samuel Huntington, and the
paramount strategic signifi cance of Sino-US relations for China’s economic development
(the US is China’s most important investor and largest export market) and security situ-
58 Andrew Hurrell, Hegemony, liberalism and global order: what space for would-be great powers?,
in: International Affairs, 82/1, 2006.
280

ation (for example, as regards the Taiwan question) has again and again induced China
to join forces with the US.
In recent years, however, the more active foreign policies of some emerging countries
have increasingly come into confl ict with US and European aims. In its dealings with resource-rich
countries in the Middle East and Africa, China cultivates the image of a country
that stands up for national sovereignty and opposes regime change and intervention.
With a view to securing access to resources, Beijing has presented itself, often to isolated
countries, as a reliable trading partner, investor, technology supplier, lender, and provider
of development aid. Many African countries value China’s new role as an alternative monetary
fund prepared to grant politically motivated loans at preferential terms – and without
imposing “shock therapy” and conditionalities attuned to the letter of the Washington
Consensus. Bolstered by its oil rents, Venezuela is also expanding its infl uence on the
South American continent. The new donors are outlining a development model (a market
economy, but authoritarian structures in government and society) that, while it fl ies in the
face of the principles of “good governance”, is nevertheless quite attractive for developing
countries, and is even regarded as an alternative to the models promoted by Western
development agencies, above all the World Bank and the IMF (“Beijing Consensus”). There
is every reason to expect these stark differences over the issue of democracy promotion
between Europe and a number of infl uential countries to grow in scope. As regards security
decision-making too, China and Russia have in recent years increasingly proved to be
spoilers, at least from the Western point of view: Russia’s blockade on the Kosovo question
has long made it diffi cult to come to a decision. The specter of a Chinese veto has shielded
Sudan from any substantial sanctions concerning its oil concessions. Nor would China
permit any extensive resolution to be adopted against Iran – one of China’s most important
oil suppliers – without a quid pro quo. On the other hand, China’s engagement in fi nding a
solution to the North Korean nuclear issue has shown how valuable, indeed indispensable,
the contributions of these countries to multilateral strategies may be.
The US and Europe have yet to develop an identifi able strategy for dealing with the
new powers. While the US is seeking to use its nuclear agreements with India to forge
closer ties to a “new power” that is potentially well disposed toward it, its China policy
has vacillated between selective accommodation and a Cold War-style containment
rhetoric expressing alarm concerning an allegedly inevitable Chinese–US confrontation
(“Better to be Godzilla than Bambi” 59 ). Russia and China would be unlikely to fi nd a place
in a “concert of democratic states” of the kind mooted by some democratic think tanks.
But Brazil, which has in recent years thwarted some US trade plans, could become an
important counterweight to Venezuela’s attempts to forge new alliances rooted in open
anti-Americanism. Countries such as China, India, and Russia are not easy partners for
Europe either. For Europe they are part of the “world of modern states” (Robert Cooper),
typifi ed by classic concepts of power and sovereignty, noninterference in the internal
affairs of other states, and the notion of a balance of power in international relations.
The question of authoritarian legitimacy poses serious problems. This also sets narrow
limits on attempts to win these countries as allies for the project of developing an “effective
multilateralism”, in particular when it comes to issues such as human rights and
environmental and social standards, to which Europe is deeply committed and which the
countries in question have considerable diffi culties in accepting. The signals from the EU
59 John J. Mearsheimer: Better to be Godzilla than Bambi, in: Foreign Policy, Issue 146, 2005.
281

and the US indicating interest in better integrating the rising powers into global management
have been weak. After the failure of the attempt to reform the UN Security Council,
and in view of the no more than marginal adjustments made to the IMF’s quotas/voting
power and the very guarded market-opening process announced by the G-8 (“Heiligendamm
Process”), there is little reason to believe that the rising powers will be integrated
rapidly and comprehensively into the existing, Western-oriented institutional system.
But it is also unlikely that it will come to a general break with the post-war institutions
of the international system. Indeed, the more likely scenario is that the South–South
Groups will continue to consolidate against this background, the aim being to build a
countervailing power, and this has already brought them more infl uence in the WTO.
This need not be looked at negatively as regards the overall system of global governance.
Issue-oriented and representative groups of emerging countries may enhance the pursuit
of consensus at the global level – provided, that is, that these groups do not see themselves
as mere blockade forces and that it proves possible to guide the ongoing disputes
with the core countries of the global economy into cooperative channels. This development
many even help to stabilize the trend toward regionalization. This, however, will
depend in large measure on whether the local top dogs are prepared to integrate their
regions – even if that means ceding some of their sovereignty – or prefer to view their
regions merely as spheres of infl uence. A number of emerging countries will also continue
to see themselves as watchdogs of the developing world in the international system.
But at the global level the interests of both the rising powers and the “underclass” of the
world of states are likely to diverge more and more in the future.
282
V.5 In the shadow of globalization
A damning indictment
At fi rst glance development is encouraging. Today more people than in recent decades
have access to the resources they need for survival. The number of the absolute poor –
namely those who are forced to live on less than a dollar a day – has declined, from 28%
(in 1990) to 21% (in 2002), a fall of 130 million people. Between 1990 and 2002 the number
of chronically undernourished people declined by 9 million, and access to sanitation and
safe water likewise improved. It was in particular a decline in infant mortality, achieved, for
example, through comprehensive vaccination programs, that led to higher life expectancy
– an increase of two years between 1990 and 2002. To cite another example, the prevalence
of tuberculosis declined by 20% between 1990 and 2001. Developing societies have shown
– from a global perspective – similarly positive trends. The illiteracy rate has declined, and
the percentage of women in education and training has increased. The “third wave” of
democratization has reached numerous countries. Freedom House notes that today 123 of
a total of 192 countries are “electoral democracies”, while in 1974 the fi gure was less than
one third; the number of “liberal democracies”, which guarantee political and civil liberties
in addition to the right to vote, has doubled to 76 countries in the past 30 years.
However, two developments run counter to this positive overall impression: marked regional
disparities and a weakening dynamic in poverty reduction, and a recently observed
performance deterioration on some indicators (such as hunger). This is shown not least by
the interim results of efforts to attain the Millennium Development Goals. The international
community has fallen behind on most of the goals set for 2015. If progress in human development
does not move faster than it did in the 1990s, the only MDGs that have a chance

of being reached are Goal 1 (Reduce income poverty by half) and Goal 2 (Reduce by half
the proportion of people without sustainable access to safe drinking water). This is probably
thanks only to progress in the world’s two most populous countries, China and India.
The often cited trickle-down effect has failed to materialize; in other words, the greater
economic dynamic that was expected to emerge, mitigating, in an upward movement, the
situation of global inequality and reducing the social and economic uncertainty besetting
people’s day-to-day lives in poor countries, has not developed. On the contrary, despite
an economic upturn in the 1990s, the social gulf has continued to widen both between
developing societies and between the global “haves” and “have nots”. The socioeconomic
development of emerging countries, countries in transformation, and developing countries
has also continued to diverge. In a number of emerging countries and countries in transformation
economic growth raised average income levels in the 1990s. Even though this
made it possible to reduce the number of persons living in absolute poverty, progress has
been concentrated for the most part on one population segment, the urban middle class. At
the same time, many of these countries – and this applies above all to resource-rich states
– continue to be marked by extreme social imbalances. If we look at income distribution,
child mortality, or school attendance, we fi nd that, despite the generally prosperous development
in many of these countries, disparities have continued to grow between ethnic
groups, rural and urban regions, and men and women. Health systems in particular are
seriously underfunded and often not accessible for some segments of society. While no
OECD country spends less than 5% of GDP on health care, the percentage in most developing
and emerging countries ranges between 2% and 3%, and rural areas tend to be alarmingly
undersupplied with health services. The incidence of tuberculosis and diphtheria has
begun to rise again in recent years.
While living conditions have improved markedly in East Asia, but also in parts of Latin
America, for one third of developing countries the 1990s were a “decade of despair”,
in which a number of economic and political tensions came together with environmental
and natural disasters to produce a real development crisis that has remained acute until
today. While in the 1980s only four countries showed declining fi gures on the UNDP Human
Development Index – which includes per capita income, life expectancy, and education
levels – the 1990s saw declines on the Index for a total of 21 countries, including
Russia, six former Soviet republics, and 14 Sub-Saharan African countries. Despite occasional
“poster children” such as Ghana or Senegal, a disastrous constellation consisting
of deep economic crisis, armed confl ict, poor governance, and exploding HIV infection
rates have turned back the clock in the two regions. It is here, but also in the Middle East,
that we can clearly observe the link between poverty and confl ict: the poorest sixth of
mankind is forced to cope with four fi fths of the world’s civil wars. Based on the current
dynamic, Sub-Saharan Africa is unlikely by 2015 to reach even those Millennium Development
Goals on which it has made some halting progress: only in 2129 will the goal of
universal primary education be reached, only in 2147 will poverty have been reduced by
half, and only in 2165 will child mortality have been cut by two thirds.
What is left of the “Third World”?
Even in the past, the “Third World” was, viewed in comparative terms, little more
than an “imagined community” (Benedict Anderson). The concept broadly disregarded
the empirical sociopolitical disparities between the countries and regions concerned.
The processes of differentiation set in motion by globalization, as well as by the col-
283

lapse of the Soviet Union and the East European regimes (which – even in offi cial terms
– transformed the “second world” into a developing region), have served to further
extend this world. Instead of moving resolutely to adopt the democratic and liberal
market model embraced by the West, responses to the process of globalization and
outcomes have varied signifi cantly. Having embarked on development paths based on
a mixture of export orientation and protectionism and designed to develop their domestic
markets, East Asian countries such as South Korea and Taiwan have long since
graduated from the status of developing countries; in recent years a number of East-
Central European countries have used European integration as a means of catching up
with the process of globalization; large emerging countries such as China, India, and
Brazil are seeking closer and closer integration into the global economy and are now,
in material if not (yet) in institutional terms, among its core countries; while many
tiny countries have developed offshore fi nancial centers – “capital’s red light districts”
– seeking highly specifi c approaches to plugging into the communications channels
and fi nancial fl ows of international markets. While these countries have generally
posted positive results – though to some extent accompanied by heightened domestic
inequalities – other developing countries continue to be faced everywhere with the (in
part intensifying) Third World syndromes and anomie typical of fragile political, social,
and economic systems. For example, the countries of the Middle East are partially integrated
into the world economy, but the – in part rising – rent-type revenues they earn
do little to improve their development situation; indeed, in some cases such revenues
stand in the way of economic diversifi cation and benefi t only these countries’ small
elites and often autocratic regimes. In other developing countries, in turn, individual
islands of prosperity (for example, the urban elites of coastal regions) or enclaves of
the global economy (for example, special production zones or service facilities) have
experienced integration within the global economy. Alongside corrupt elites, clientism,
and massive social problems, a tendency in these countries to discredit the state, a consequence
of the development paradigm dominant until quite recently, has prevented
individual development approaches from having an impact on higher-level structures.
Finally, the regions threatened by state breakdown – above all Sub-Saharan Africa, the
Caucasus, Central Asia, and, to a lesser extent, several Andean countries – have experienced
a massive downturn. The deterioration of the social, material, and health situation
of many people there is closely associated with a deterioration of public order:
elementary government functions – peace and security, functioning markets, human
rights, and the rule of law – are restricted at best to individual regions (such as a capital
city), if they have not broken down altogether. The “markets of violence” that often
emerge in such places serve as bases for illegal traffi cking and criminal networks of all
kinds. They are part and parcel of shadow globalization, and at the same time serve to
fi nance persisting anarchy.
Terms such as “Third World” or “the South” have always been somewhat imprecise.
A continuing process of fragmentation induced by various global ups and downs have
further undermined their usefulness as collective terms for countries with similar development
problems. The “Third World” is vanishing from the statistics, taking with
it a particular view of the global development dilemma. It is true that even rich countries
have persistent poverty segments, social disparities are deepening in the emerging
countries, there are rich elites in developing countries, and the term “Third World”
has developed from a geographic category into a social category used throughout the
284

world (Marc Berger). But far from being uniform, the impacts of global problems are
geographically concentrated, whether in terms of health, climate, nutrition, or confl ict.
Regardless of social differentiation, the fact remains that a small part of the world’s
population, living in the North, continues to enjoy the lion’s share of world income,
and worldwide social and economic distributive injustices not only persist but are deteriorating.
It is therefore interesting to note that the proclamation of the end of the “Third World”
coincided with the search for new lines of confl ict, now defi ned less in socioeconomic
terms than in terms of security and culture. The development dilemma now found itself
displaced by the security dilemma 60 – at least in the eyes of the North. Countries and
regions of the South are now perceived as a security risk, and at the same time classic
development problems such as poverty, hunger, disease, and environmental crisis are being
redefi ned as security problems with an unpredictable impact on the countries of the
North. Only a distorted view could, without further ado, diagnose the establishment of
a new, uniform concept of the enemy, casting the South in the role of the new East and
switching from Marx to Mohammed. In contrast to the Cold War, the situation is not that
of compact, clearly defi ned opposing sides arrayed against one another, nor is there any
good reason to expect this to happen in the near future – the problems involved are too
intricate and the interests and coalitions differ too greatly.
But regardless of whether we speak of the Third World as an institutionalized and politically
effective group, the semantic core of the Third World discourse serves as a vehicle
of identifi cation in international relations. The Third World discourse has been invoked
time and again in connection with recent disputes, from trade policy and the nuclear
confl ict with Iran, to Hugo Chavez’s “Bolivarian Revolution”, as a means of calling for
solidarity. The background here is the growing crisis of confi dence between some leading
countries and regions of the North and a number of societies of the South. Some of the
major development initiatives launched in recent years have produced little or nothing in
terms of results. The Doha Development Round, for example, is close to collapse, without
having reached any appreciable progress for the developing countries. Millennium
Development Goal 8 (Global partnership for development), too, which is predicated on
the direct involvement of the developed countries, has yet to be implemented. But what
best typifi es the asymmetry of the North–South relationship is not only the economic
powerlessness of many countries in the South, but also the security-based marginalization
of many of its countries in the wake of the 9/11 attacks.
Many countries of the South “enjoy” the attention of the North only if they develop
the potential to cause chaos (“Chaosmacht ”); that is, if their social, economic, and ecological
destabilization potential is great enough to impact the international system. The closer
this insecurity gets to the North, the more confrontational, it seems, the methods used
in the South to address its causes. This “securitization” of relations already threatens to
occlude the global development dilemma, even though it points to severe socioeconomic
disparities that know no borders, ethnic groups, and religions and is itself at the center
of most global challenges.
In view of the profound changes brought about by the end of bloc confrontation,
globalization and the security-policy boom, it is not surprising that development policy
is also faced with new challenges. The basic problems are still there. Poverty, unem-
60 Dieter Senghaas, Wohin driftet die Welt? Über die Zukunft friedlicher Koexistenz, Frankfurt,
1994.
285

ployment, environmental degradation, violence, war, expulsion, and lack of access to resources
– these are among the factors that continue to determine the lives of a large part
of mankind. Yet the altered global parameters for development policy, strained budgets,
and a lack of visible successes again raise the basic question: Where, when, how, and by
whom is development policy to be provided? The development agenda is the subject of
constant criticism from the most diverse quarters – for its failures and its successes, its
limitations and the huge number of tasks and expectations it is burdened with, its lack
of effi ciency, its wrongheaded defi nition of priorities, and for having too much and too
little money. Should, as development “saints” such as Jeffrey Sachs propose, another 75
billion dollars be mobilized to usher in the end of poverty? Are these, as “development
pessimists” such as William Easterly assume, more ideas from the realm of the nineteenth-century
utopians that are hardly suited to illuminating the “heart of darkness”?
Should, as Paul Collier suggests, development policy concentrate on the “bottom billion”,
along with a new trade policy and a robust approach in peacemaking and peacekeeping?
In recent years development policy has without doubt undergone a marked process of
heterogenization, affecting both its strategies and its actors. Should development policy
be used to fl ank bilateral relations and support security engagement? Should it pursue
a more selective approach – what countries should it select, and using what criteria?
Should development policy focus on worldwide programs concerted by the UN, or seek,
for example, to ease social pressure on Europe’s periphery? What development priorities
should be set?
Underdevelopment has always been a complex condition; it involves countless
factors and cannot be reduced to a common denominator. The processes of change
described above have, however, further broadened the object of development policy.
While development cooperation with successful emerging countries will focus more
on exchange (for example, issues bound up with education, technology, and the environment),
the task with failing states will be to set fundamental social and political
functions in motion again and to stabilize them. While governments will continue to
be important addressees of development policy and recipients of development aid,
today there are a number of different substate, non-state, and transnational institutions
that function as recipients. The donor side has also become more differentiated.
Alongside the traditional donor countries and multilateral development agencies, a
growing number of private funds, foundations, and NGOs have become active in the
fi eld, more developing countries are able to obtain commercial loans, and new donors
such as Venezuela and China aggressively fl ank their interests by providing material
and political aid, preferential loans, and infrastructure projects. China’s new role as
an alternative monetary fund is appreciated in Africa, and the development models
subscribed to by several of the new donors often confl ict with the principles pursued
by the EU. The close links between development policy and the concrete, often shortterm,
foreign-policy interests that typify even the approaches of a number of traditional
donors could lead to a decline in the willingness to engage in multilateral development
cooperation, undercutting both the possibility of reaching agreement on joint development
priorities and interest in evaluating development measures and objectives on a
continuous basis.
In Germany development policy has in recent years become more political and more
publicly visible. One new development that has boosted the relevance of German development
policy is Germany’s declared intent to further develop classic development pol-
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icy into a global structural policy that focuses on contributions to solving central world
problems, intervenes at a great number of different political levels, sets itself the task of
playing an important role in shaping global framework conditions, and gets involved in
trade, security, technology, and environmental policy. But even the new security frame
of reference means that more attention is now paid to development goals, as well as to
the need to forge closer links between security policy and development policy. In fact,
development policy has broken out of the confi nes imposed on it as a “playground for a
handful of philanthropists” (Erhard Eppler), and some of its tasks, now viewed as “preventive
security policy” (for example, focusing on the problems of failing states), have
gained new relevance. But security policy is a diffi cult new fellow traveler. Security always
also implies protection from and against others. In the years to come, development
policy must endeavor to ensure that development-policy tasks remain autonomous and
that development goals are keyed less to security considerations than to people’s universal
social rights and needs. At the same time – and it is important not to overlook this
– in this situation there remain a number of substantial goal confl icts, for example, in
agricultural and trade policy, and many of these are resolved by way of factional policy
decisions, usually at the expense of development policy.
In view of the ways in which development policy has been enlarged and the greatly
increased expectations that have become attached to it in recent years, the time has come
to refocus the fi eld – both by setting sustainable priorities and on the basis of improved
coordination. There is nothing particularly surprising about either of these two challenges,
and they are as old as development policy itself. But if we look at the numerous new
actors involved, the cross-cutting issues, the new conception of development policy as
global structural policy, and the repoliticization of development policy, we will fi nd that
the need to meet these challenges is more acute and important than ever, in particular
with a view to developing a set of strategies that are at once more robust and more resistant
to disillusionment. Poverty reduction must remain the main focus of development
policy in the years to come. Widespread underdevelopment, as well as economic and
social inequalities between and within countries, often serve as the breeding ground for
other, for example, ecological or security, crises. The sine qua non for achieving sustainable
development successes, or at least for not destroying successes that have already
been achieved, is a peaceful and stable society. That is why it is essential to further expand
the fi eld of crisis prevention and confl ict resolution. The paramount goal of development
policy must be to make itself superfl uous. A further priority is to provide help
for people to help themselves, for example, through long-term support for and increased
use of dialogue-oriented civil society organizations, from the municipal to the regional
level. Furthermore, development policy must continue to be vigorously involved in shaping
global framework conditions that have a real impact on the development chances of
the countries concerned. Finally, in view of the great number and variety of actors and
cross-cutting issues involved, coherence and harmonization will remain a key issue when
it comes to boosting both the transformation potential and the effi ciency of development
policy. However, the only way that German and European development policy can
forge a more coherent strategy – although there will of course always be contradictions
– is on the basis of a political debate on the goals of development policy. No long-term
development strategy is needed for ad hoc disaster relief or to fl ank narrower security
interests; but one is needed for a development policy designed to solve important global
problems.
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288
VI. THE STATE OF THE FUTURE – SCENARIOS OF GLOBAL DEVELOPMENT
The more general and comprehensive the object of scenarios, the more diffi cult it is
to reduce the huge number of possibilities to a few lines of development and the coarser
the pictures we come up with are likely to be. The following scenarios are predicated
on the assumption that the factors “capital”, “crisis”, “cooperation”, and “culture” and
their specifi c confi gurations will play a crucial role in determining how international relations
develop in the years to come. Of course these quite general factors already contain,
in clustered form, a great number of more specifi c infl uencing variables. For instance,
the important parameters of the factor “capital” include global economic development,
distributive justice, technological innovation, migration, and trade policy. In addition to
security-policy development, those of the factor “crisis” include the impact of global challenges
such as climate change and the environment or health. Among the parameters
of the factor “cooperation” are the development of international organizations, bilateral
relations, and regional integrations, as well as the character of global governance. Finally,
the factor “culture” includes the development of democracy and human rights and the
role played by religion.
VI.1 Microsoft world
Once again, it was all to be left to the logic of the market and the forces of globalization.
From 2010 on, it took the fi rst commercial breakthroughs achieved in bio-and nanotechnology,
as well as the integration of new markets, to stabilize economic upturns.
The false prophets of the New Economy and their precipitous end were soon forgotten.
Following years of gentle doubts about the market’s governance performance, governments,
the boards of international organizations, and the media once again set their
hopes in the market. Having made the necessary adjustments, it would, it seemed, be
possible to continue with the development paradigm dominant over the past decade.
And after years of fear of the Chinese dragon and uncertainty over a new trade geography
– sparked by a number of prosperous emerging countries – the old Western centers
of the global economy would now have their turn again. The US, thanks to its economic
dynamic, its political infl uence, and its military capacities still the only real world power,
is now the world’s technology lab, the undisputed benefi ciary of the new cycle. Its good
relations with China and its prospering economy have made it easier for the US to keep
its defi cit under control.
But the EU has also adopted a new growth path. Based on the favorable economic
situation in Germany and France – due not least to the growing markets in China and
India – but also in the booming Central European countries, whose “Danube model”
has spilled over to the rest of the EU, the Union has fi nally been able to overcome years
of economic stagnation. The successful (partial) implementation of the Lisbon Strategy
(privatization, technology promotion, and education/training) and a new growth and stability
pact were the crucial steps needed, and they were driven primarily by a new Euro
Trio. Once the task of working through the EU’s political agenda had turned out to be
extremely diffi cult, and a rump Constitution had barely been ratifi ed in 2008, Germany,
the UK, and France recollected that the most successful and pragmatic motor of integration
was the economy. Now the motto was, once again: Less Madison and more Monnet;
less state-building and more European Hansa. Targeted efforts were made to reawaken

memories of the successful single market project in the mid-1980s. Europe’s socially
exhausted societies, regularly turning down by referendum any efforts to deepen and
enlarge the Union, remained skeptical. But the program really worked. The new dynamic
eased the situation in the labor market, subdued the populist anti-European attitudes in
several eastern European countries, and facilitated the integration of the growing number
of job-seeking non-European immigrants. More and more countries joined the euro zone,
and today Europe speaks with one voice in the World Bank and the IMF.
Europe’s successful growth path also revived the conviction of many in the US that
Europe could be a powerful partner in world politics. A clear sign of this new dynamic
and at the same time the core of the global economy is the Transatlantic Free Trade
Agreement (TAFTA) concluded in 2015 between the US and the EU. Outside the core
zones of the global economy, the world continued to become increasingly differentiated,
and today’s global markets are at once more integrated and more hermetic. Countries
such as China, India, and Brazil have achieved greater economic weight – not least at
the expense of Japan, which, thanks to its inability to come to terms with demographic
change, was forced out of the “triad” in the early phases of globalization. While it is true
that a number of mutual blockade strategies suffi ced to dismantle the WTO toward the
end of the last decade, it nevertheless subsequently proved relatively easy to forge ahead
with market liberalization on the basis of bilateral trade agreements. The EU and the US
managed to integrate those emerging countries that were orientated more to the world
market than to their own regions into a number of comprehensive investment regimes,
winning them over, in bilateral agreements, for a joint dispute-settlement mechanism.
The massive US and EU investments in Asian markets now also began to pay off. In many
areas the emerging countries continued to produce for Western corporations, and spectacular
takeovers of US or European corporations by Asian interests continued to be the
exception. The most prominent Western victim of the new surge of globalizations is the
European agricultural market. At fi rst remaining sealed off, it was fi nally, and gradually,
broken open by budget restrictions imposed by the member states, increasing demand
for agrofuels, and the growing importance of access to the gene pool in the developing
and emerging countries.
However, a twofold dualism stabilized in the shadow of the new economic dynamic.
“Globalization 2020” is used today both for a new wave of market penetration and as
a symbol of a world divided – into 20% rich countries and 20% rich people in these
countries. Billions of poor people form a global underclass that does not benefi t from
the constantly invoked trickle-down effects of the global economy and has hardly any
chance of escaping its misery. In many developing countries, but also in several emerging
countries, social polarization is undercutting fragile democratic systems and the North’s
persistent attempts to modernize these countries on a free-market basis.
In this world dominated by the “old hegemons”, the transatlantic relationship has
(again) become the most important economic and political axis of world politics. The
2007 obituaries describing the agony and demise of “the West” and its former leading
power proved to be premature. The vital and institutionalized economic relations between
the US and the EU and the US government’s gradual process of opening up to
selective bi-and multilateral approaches facilitated the (re)building of a stable transatlantic
bridge. More than in the post-war era, concrete projects now formed the basis.
The tandem launched new initiatives on trade policy, the Middle East, and energy and
trade policy. However, security policy remained a point of contention between the part-
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ners, even though the dispute lost much of its edge once the US had withdrawn from a
persistently unstable Iraq. While the fi ght against terror organizations – based mostly on
police measures, but also including some limited military actions – weakened these organizations,
terrorism has remained a central security issue, thanks to sporadic attacks,
conducted for the most part in the Arab world and in Europe. With the tightening of the
domestic security laws in many Western countries, the diffi cult balance between freedom
and security was maintained on the outside. While it may not be possible to defeat it, terrorism
does appear to be manageable, and the world has thus far been able to avoid the
outbreak of a “cycle of fear” that might have spread rapidly to free trade and restricted the
investment activities of the EU and the US. This is one of the reasons why the EU resisted
sporadic US attempts to transform NATO into a NAATO (North Atlantic Anti-Terror Organization).
But NATO assumed new relevance due to gradual convergence of the threat
analyses carried out by the EU and the US, as well as the more pragmatic approach taken
to transatlantic relations, to say nothing of France’s abandonment of its aspiration to
become the world’s countervailing security power.
Europe has been unable to close the military-technology gap with the US, and it now
also sees NATO as the only organization able to conduct a wide range of missions reliably.
The European battle groups are presently being integrated into an “Americanized” NATO.
No other strong alliances have emerged. The most important emerging countries are
orientated to the leading Western power: India is closely tied to the US by economic, military,
and technology agreements; China does not dare to cross its most important investor
and export market; and Brazil, unloved in its region, has been offered attractive trade agreements
– also in view of the growing unrest in Latin America and a number of social crises
that have now reached Cuba and the Andes region. While there still is some cooperation
between the emerging countries, these projects have lost much of their visibility and relevance
since the relative demise of the WTO, the only forum in which the Southern coalition
managed to develop any countervailing power. Relations with Russia remain diffi cult,
and it is now more relations with the “stranded world power” than the “war on terror” that
are responsible for permanent discord within the transatlantic tandem – but also within
the EU. Interested in close energy ties with Russia, the EU would like to expand political cooperation
with Russia’s authoritarian government, but this project has been blocked again
and again by the US and individual Central European countries, particularly in relation to
technology cooperation or the Euro-Atlantic security dialogue.
Greater market penetration – paradoxically – have gone hand in hand with a renaissance
of classic governance in international relations. National sovereignty, intergovernmentalism,
concerts of states, and ad hoc country groups have assumed new relevance
in world politics. On this basis diplomatic solutions have been found for some classic
problems, such as the nuclear arms programs in North Korea (here thanks above all
to a relaxation of tensions between North and South Korea) and Iran, although little
headway has been made in developing instruments and solutions for complex global
problems. The idea of a more closely networked and more fl exible world governance became
less and less attractive as national governments in Europe, the laboratory of these
innovations, sought to raise their own profi les at the expense of the EU Commission and
Parliament, the US resisted any further integration, and the emerging countries saw no
alternative to a nationalist foreign policy. Europe is “stricken with utopian blindness”
and dried up institutionally. Apart from the institutions of the single market and the
common European currency, no recognizable progress has been made. At the global level
290

negotiations have continued on framework agreements and conventions, but the results
have been meager. Little has been done to address the lack of representativeness of the
most important international institutions. While spontaneous country coalitions, which
include the emerging countries, have launched initiatives on trade and energy policy, the
UN is still neglected. In 2007 the “short summer of climate protection” led above all to
the realization that environmental costs need to be integrated into the market paradigm
– from which Germany, the “global environmental engineer”, has been able to profi t – as
well as into some individual trade agreements, but not in a global environmental policy.
Climate change has had a severe impact on the world’s poorest regions, and the collapse
of the world’s fi sh stocks has deprived millions of people of their livelihoods. The mixed
results of the review of the Millennium Development Goals and a lack of confi dence in
the Western countries in the effectiveness of government programs have brought development
policy under mounting pressure. While private initiatives have become more
and more important, they tend for the most part to fi zzle out, together with their shortlived
CNN effects. The “moral warming” of the aid concerts held early in the century
have now given way to calls for a new George Soros for Africa. While the latter has not
yet been found, the brain drain to a prosperous Europe has continued to undercut the
intellectual independence and the self-help capacities of Africa and the Middle East. The
UN has again begun to assemble high-level panels in response to social tensions – which
have erupted with particular violence in the major cities of the Arab world – the return
of hunger, which was thought to have been eradicated, water confl icts, the continuing
destabilization of a number of developing countries, and increasing migration pressure.
Microsoft world has revitalized the market principle, cementing the economic and political
superiority of the old Western bloc and their traditional hierarchies. A set of centralized
power instruments are used (successfully) to address confl icts left over from former
times, but they have little relevance to today’s global problems. The crucial fl aws in the
system include a neglect of global governance and a lack of regard for social issues and global
equity. The old “New Economy” is today’s “Now Economy”. As long as the sales fi gures
are right and the security gaps are not too big or too costly, the West sees no problem in
prolonging its model for prosperity and development, although it does so less euphorically
than just a few decades ago. The dominance of the West has led to nothing, and nobody
believes in the “triumph of trade over war” any more. The problems are known, but no one
is listening to the calls for action, and political initiatives continue to be delayed and obstructed.
In this scenario power is the “ability not to have to learn” (Karl W. Deutsch). The
growing pressure from outside is making Microsoft world more hermetic, and its inability
to develop inclusive systems ultimately threatens its very existence.
VI.2 Firewalls
The opportunity in world politics to give globalization an inclusive, more democratic,
and social shape was missed. In a polarized world the idea of the global village collapsed
like a house of cards. Today the European Union, which has now improved its security
profi le, is on the frontline of numerous confl icts, in a world that, once more divided into
spheres of infl uence, has become more distrustful and less cooperative.
While the last surge of globalization opened some additional markets, it also left behind
a set of growing social, political, and cultural tensions. Along the external boundaries
of the European Union, we fi nd zones of stability verging abruptly on crisis-shaken,
291

unstable regions. Beyond the booming Central European countries, eastern Europe has
increasingly become Europe’s shadow region. Extreme social disparities, criminal networks,
and the exodus of the region’s modernized elites have weakened these semidemocratic
societies, paving the way in some of them for a transition to authoritarian and ultranationalist
regimes. The Balkans, too, are split and have retained most of their confl ict
potential. Ethnically troubled and economically exhausted countries such as Bosnia and
Serbia are still waiting for EU accession. From Morocco to Iran, in Europe’s immediate
vicinity, we now fi nd a persistently unsettled, “seismic” region in which a large number
of different confl icts are played out at the same time: classic territorial and hegemonic
confl icts, religious confl icts, disputes over religion versus secularism and democracy versus
autocracy, the confl ict between poor and rich, the contradiction between aged societies
and general overpopulation. “McWorld” has left deep traces here, with globalization
benefi ting the educated middle classes, while the majority of the growing population has
fallen deeper and deeper into poverty. This made it clear, once again, that the clash of
civilizations is above all a confl ict within the world’s Islamic societies. While some countries
have managed to develop a – fragile – form of Islamic democracy, others have failed
to adapt their politics, and the corrupt and autocratic elites have been swept away by
socioreligious movements. The uprisings began among the numerous unemployed young
men in urban centers, and the subsequent confl icts between various factions continue,
threatening to break apart countries such as Saudi Arabia. Israel has responded with
military force to the continuing destabilization of its neighboring countries. Segments of
both the educated and the excluded population have joined these movements, and more
than ever Europe is now a beacon to the secularized middles classes, which are fl eeing
their increasingly radicalized societies.
These confl icts are now threatening to strangle the European Union, and sporadic
terror attacks are making it clear to Europeans that their continent has become the most
important area of operations for terrorists. Problems with the EU’s institutional consolidation,
the population’s enlargement fatigue, and, at a later juncture, the focus on the European
security project have in recent years led Europe to neglect its integration efforts
and to discontinue its most successful external project, the prospect of EU accession.
“Surprised” by the great number and ferocity of the confl icts occurring outside its gates,
the EU’s only practicable option for the short term appeared to be military card, which
has entailed repressive consequences at home, while the core project of a “civilian power
Europe” faded further and further into the background. The mounting pressure fi nally
provided the impulse to develop a comprehensive security project, which has become
the fl agship of EU integration policy in recent years, largely meeting with the approval
of a population that has been continuously alarmed by repeated new risk warnings. The
sounding siren and the blinking light are now part of Europe’s day-to-day experience.
Cooperation between police and intelligence services has been intensifi ed, troops are
regularly used throughout Europe, and a European border police force – “Euroborder”
– has been created, mainly to seal off Europe’s eastern boundaries to organized crime.
On the heels of the attacks on the Öresund Bridge and at the Champions League fi nal
in Paris-Saint Denis, the most weighty European countries – without US participation,
though with its tacit assent – opted for air strikes against terrorist positions in the uncontrolled
parts of Saudi Arabia. This was done on the basis of a systematic expansion
of ESDP, including above all efforts to pool European troops and to continue restructuring
military capacities. However, the political task of implementing the security strategy
292

was long a contentious issue, and it was fi nally effected by a core group of EU member
countries, including France and Germany as well as the UK, once the US had begun to
withdraw more and more from the task of protecting Europe’s periphery. In the past
fi ve years the fl ic européen, as Europe is now referred to in some Arab newspapers, has
carried out a number of missions, for example, in support of efforts to protect pipelines
in Central Asia and the Caucasus, and in the capacity of a stabilization force in one of
the water confl icts besetting the Arab region. The strain on capacities is growing visibly,
particularly in view of the fact that the EU has little support to rely on. Both the project,
designed to autonomously deepen the EU in security terms, and a lack of US interest
have now cast NATO as a relic of the Cold War, whose forums are still used for discussion
purposes, even though the organization lacks any prospect of taking action. The European
security project has consolidated in institutional terms and the concerns expressed
by the small member states have lost so much of their cogency in view of the range of
threats they face that the project of creating a European Security Council is now taking
concrete shape; the Council is to comprise four permanent members (Germany, France,
the UK, and Poland) and two rotating members.
When it comes to security policy, the contrasts between the rival European nations
have tended to blur, although the deepening process cannot conceal the fact that nationalism
is again raising its head in Europe, the integration process has virtually come
to a standstill in many areas, and the large European nations continue to call the shots.
Today Europe is little more than a transnational security state with a free trade area. But
some individual voices have criticized “Fortress Europe”. Europe’s societies have become
more authoritarian, conservative, intolerant, and closed. Many Europeans are willing to
abandon some of their civil rights and liberties in favor of heightened security arrangements
designed to protect their – still high – living standards. With a view to easing the
strain on Europe’s social insurance systems and ensuring that industry is supplied with
skilled workers, the age of retirement has been raised even further. Only a few European
countries still recruit in global markets, while the siege mentality rampant in others has
led to substantial restrictions on immigration. Populist sentiments against immigrants
and minorities are widespread, and calls for sanctions against Israel are, for the fi rst time,
falling on fertile ground.
Political uncertainties, nationalism, and growing mistrust have led to protectionist
tendencies in the world’s markets, and these in turn have consolidated to form a new
regional mercantilism. While there is still trade between the blocs, its organization and
practice are bound up with substantial frictions. At fi rst, security measures were stepped
up in communications and transportation, high-tech research was subjected to more
control, and transnational cooperation was restricted. Contrary to expectations, energy
has already become the Achilles heel of the global economy, which is forced to contend
with substantial price volatility and temporary shortages. These are due less to political
blackmail or terrorist attacks than to lack of investment and the slow diffusion of sensitive
production technology. The US Congress has shown itself increasingly skeptical
about new liberalization initiatives, and with the signs of a looming recession becoming
increasingly clear, it approved a set of restrictive laws designed to prevent takeovers. The
US has relied on its strong domestic market, intensifi ed its efforts to develop self-reliant
technologies in the energy sector, rediscovered its Latin American backyard, and sought
– at times in the face of resistance – to integrate the Western Hemisphere into a free trade
area. But signs of recession have made it increasingly diffi cult for the US to cope with its
293

huge budget defi cit in political and economic terms, particularly because the fi nancial
infl uence of China and South Korea has grown in recent years. The EU, dragging its feet
in implementing the Lisbon Agenda, has erected high trade barriers focusing on social
and environmental standards to stave off imports from (South)East Asia and has now,
in response to protectionist tendencies in the US, decided to protect its undercapitalized
banking sector. National champions are enjoying a renaissance. However, the European
economy’s high degree of internationalization has rendered it more vulnerable, the volatile
euro–dollar relationship has become an uncertainty factor for exports, and the crisis
belt surrounding the Union constitutes an obstacle to further stable expansion of the
European Economic Area.
Now that the Doha Round has failed once and for all, the WTO, now headquartered
in Singapore, has made a new start as a regionalized institution, focusing on regional
free trade areas as well as on promoting interregional political exchange. In view of US
and EU protectionism, the emerging Asian countries, among others, have turned more to
their own region. Russia continues to derive self-assurance from persistently high prices
for raw materials, although it is too weak to go it alone and remains welded to Europe by
energy policy. Together with China it provides sporadic support for the “Caracas Bloc”,
however, a loose alliance of resource-rich countries that were originally cemented together
by their anti-Americanism and are today linked mainly by technology and arms
transfers. Most of these countries have drifted from the “twenty-fi rst century socialism”
they proclaimed at that time into what is now little more than “charitable cleptocracy”.
But not all regions belong directly to a sphere of infl uence. The world’s least stable regions,
including the Middle East, Central Africa, Central Asia, and the Caucasus, have become
arenas of global rivalry for the “nonaligned countries”, although so far this has not
led to any confl icts between the major powers. However, looking at the looming resource
crisis and the easier access to the natural resources around the North Pole afforded by
global warming, we see a confl ict looming between Russia, the US, and Europe; after all,
Russia was the fi rst country to plant its fl ag on the ocean fl oor beneath the Pole.
In times marked by a renaissance of national sovereignty, the international institutions
have little to say when it comes to resolving such confl icts. Europe has lost the
normative infl uence it once had as an integration model and developer-in-chief of new
forms of governance. Since what the US population saw as a forced withdrawal from
Iraq, the US has, in political terms, been on the way towards splendid isolation. Under a
Democratic administration a missionary America revived, for a brief time, in the idea of
a “concert of democracies” that would have prolonged the Republican “Pax Pentagon” on
a multilateral basis. But this was followed by a large measure of skepticism in the US administration
concerning whether it would make sense for the US to engage internationally
once again, beyond securing its own narrow interests. While economically prosperous
middle classes have developed in a number of emerging countries, their members tend
to think in nationalist terms and show little interest in further democratic development
and international cooperation. Now and then decisions of major scope are taken in ad
hoc groups, including, for example, decisions bearing on the protection of important sea
lanes from terrorist acts. The debate on the provision of global public goods has fi zzled
out; ecosystems are protected locally and in the richer regions, if at all; and urban migration
has risen sharply on account of desertifi cation and environmental degradation. The
United Nations, chronically underfunded, is today largely restricted to a policy based on
appeals. Only Sub-Saharan Africa has remained the “UN continent” – with poor pros-
294

pects for the future. Both the European countries and Europe itself regard agriculture as
one of their sovereign activities, and they are therefore sealing off their markets. With the
failure of the Millennium Development Goals, fewer donor countries were willing to go
on providing global funding, and the major donors – most of them European – are now
focusing their funding more on their immediate periphery.
Politics in the Firewall world is ruled by fear and friend–foe thinking. The motto is
“government without governance”, and here the strong state has dethroned the market
state. Security, guaranteed by the sovereign state, is the guiding principle of political action.
Security is equated more and more with defense and less and less with trust. However, society,
state, and politics cannot function under the conditions of institutionalized mistrust.
It is a time in which the response to crime is war, a time of ever more closely meshed fences,
of the well-contrived security instrument, of the thousand-gate gated community, of the
“sleeper”, and of high-fl ying illusions concerning the airtightness of the system. “Hell is
– other people”, and today everyone is looking for his or her own separate peace, using
political, economic, technological, and cultural fi rewalls to shut out their neighbors, their
district, other countries and regions. “Batten down the hatches!” is the motto, even though
this can ultimately lead only to more furious attacks and further insecurity.
VI.3 The Linux option
The Linux option is no ideal world. It continues to be beset by confl icts and fl agrant
social disparities, and the power of the nation-state is, if not unbroken, at least one of the
key factors of international politics. But the world is more socially integrated, more innovative
in democratic and political terms, than it was only two decades ago. It was broad
access to information, education, and technology that made this development possible.
In today’s world of short distances and broad communications no one is waiting for the
big breakthrough, the world formula that would eliminate all problems at once. Instead,
work is under way at countless small construction sites to come up with different solutions
for different problems, although work on transforming the world’s regional and
global institutions has just begun and will remain a task for the future.
Hardly anyone was fooled by the ecological Potemkin villages set up by the Chinese
Central Committee around the competition sites: the 2008 Olympic Games in Beijing
presented the world with a dark ecological scenario that concisely illustrated the problem
of overexploitation and the fi niteness of the world’s natural resources. The West has
become more and more sensitive to the fact that ecological collapse is inevitable if the
modus operandi of the industrialized and the emerging countries continues to be the
“business as usual” of those dedicated to the Western growth model and lifestyles. The
2007 Stern Report on the economic costs of climate change and the inevitable increase in
extreme weather events in the US and Europe dismantled piece by piece the repression
mechanisms and the illusions cherished by Western societies when it comes to the state
of the world’s ecosystems. In the Mediterranean Sea – the Germans’ “favorite bathtub”
– the jellyfi sh now rules. These creatures thrive in today’s increasing water temperatures,
and the few fi sh still surviving are nowhere near enough to keep them in check – pizza
with tuna has become a bit of a luxury!
When, just a few years later, millions of people in China were affected by an acute
water shortage, and after ecology had been made out as the worst possible drag on the
economy, Beijing announced a “Clean China” project designed to give a sustainable
295

shape to the Chinese development model over the course of the next two decades.
This paved the way for a variety of international cooperation projects. The EU used
the ASEM talks as a forum to intensify its environmental and energy dialogue with the
Asian countries; the objective was to export European effi ciency technologies that had
been developed over years of intensive research. The new US administration now also
committed itself to an environmental policy that had been in place for years in the large
US states, such as California. In coupling climate protection with technology transfers,
the G-7 countries managed to work out an agreement with the rising powers on effective
and binding reduction targets, and it was hoped that this agreement would lead
to a Kyoto II. The developing countries were skeptical at fi rst – they, after all, were the
main victims of a faltering and delayed climate policy. Some fi rst incentives were created
by the “PAC Fund” (Protect and Adapt Climate), which is used to fund measures
designed to adapt to the reality of climate change. China’s successful learning strategy
spilled over to the Asian region, the production of and trade in agrofuels induced a
number of countries to become involved, and the World Bank supported more structural
climate projects, although these focused on municipal development more than in
the past. In addition, the region-wide supply of Africa, Southeast Asia, and the former
Soviet republics with HIV drugs decided on in 2010 has led to a an appreciable improvement
in North–South relations, which had been marked in recent years by a good
measure of distrust. Furthermore, the conclusion of the “EU–Mediterranean Free Trade
Agreement”, covering an area extending from Morocco to Syria, has contributed in
important ways to breaking down friend–foe modes of thought, inducing a number of
Arab countries to embark on a course of further democratization. The signing of Kyoto
II coincided with the attempt to drastically reduce catch quotas once it had become
evident that overfi shing has depleted the stocks of the most important fi sh species and
the fi rst riots by fi shermen were reported from India. The moratorium designed to allow
stocks to recover at the same time inspired hope that fi sh-farming methods that are
both industrially and ecologically compatible might gain broad acceptance.
There is no doubt that the environmental and health agreements signed at the beginning
of the century have served as pacemakers for a new start for global governance.
But more important today than the “great historical affairs of state” are the numerous
bottom-up initiatives that have come about in conjunction with an increasing diffusion
of technologies in the world’s societies. Today, mankind’s – in part submerged – intellectual
resources have proven to be just as important as biodiversity. The relevant
projects are keyed to different levels of politics and society and serve to underpin the
efforts undertaken by “offi cial” politics in the fi eld of (global) governance, although
they often also pave the way for such efforts. The processes of renewal and exchange
observed today in many regions of the world have had a quite a number of different
causes and results.
Early in the past decade, the continuing loss of confi dence in the world’s central political
institutions led in the West to the reemergence of more dissident circles. However,
the aim of the new civic movements and initiatives devoted to day-to-day solidarity was
less to seize political power at the national level than to take over – initially for the most
part local – substructures in order to try out more representative forms of politics, to put
cities and communities on a sustainable and social development path, and to organize
exchange with and links to other projects. For example, a signifi cant change in energy
consumption patterns in Europe made it possible to push through decentralized energy
296

systems against the resistance of national champions. Today, BP’s “Beyond Petrol” prize,
awarded to promote both effi ciency technologies and the development of new sustainable
resources, is as widely known as the Nobel Prize. Growing resistance in Western
societies to the (non-transparent) introduction of new technologies led to public debates
in countless blogs and Internet forums, and these in turn forced the companies and institutes
concerned to make the results of their research and applications activities available
to the public. Countless scouts, armed with video cameras, camera cellphones, and
laptops, now provide information on government and corporate activities in the remotest
of regions. Recent years have also seen the emergence of a kind of “economy of attention”
that, based on electronic networking and increasing consumer organization via the
Internet, has made it possible to use any number of different criteria to fi nd numerous
alternative and effi cient watchdogs and ratings for corporations and products, but also
for governments. “Corporate social responsibility”, no longer simply a public relations
exercise, now began to work, with environmental costs being incorporated in portfolio
strategies and insurance companies contributing in key ways to the environmental reconnaissance
work required for large-scale projects.
Powerful PCs and broadband networks are the twenty-fi rst century’s two main coordination
techniques, education and information its key resources. Even today the world
is no global village, and access to information and communication continues to be unequally
distributed. But electronic communication between and within the regions of
the world has grown at a rapid pace. While radio and telephone took years to become
widely disseminated, the Internet conquered the world in a few short years. The emerging
countries and large parts of Asia and Latin America have continued to close the gap
on the Western industrialized countries. Africa and the Middle East still have some way
to go. The massive UN literacy campaign and the infrastructural support (for example,
making use of MIT’s 100-dollar laptop) provided by the EU, the World Bank, and the
UN “Digital Fund”, however, have helped to narrow the digital gap. The UN and the
regional organizations have initiated a number of comprehensive e-learning programs,
and today Hamburg’s Open University is one of the world’s largest educational institutions.
A tax on capital transfers is now, 25 years after the fi rst debates on the matter, set
to fund future development-related investments in education, infrastructure, and health.
Thanks to better access to education, increasing secularization in a number of countries,
and some initial successes in the struggle for social rights, women are today the decisive
actors behind change in the world’s developing regions. The “Women’s World Bank”
provides massive support for microenterepreneurship, most of which goes to training,
health, ecology, and social welfare; women now play the key role in local administrations
and political institutions.
In many countries civil society relies on better-organized local physical neighborhoods
and virtual “digital nations” constituted via the Net. In recent years many corporations
have also recognized that they stand to benefi t from societies’ collective intelligence
if they open up and more and more research tasks and development problems are taken
care of by self-governing external networks. Today, over 80% of corporate product innovations
stem from these extended virtual workbenches. But while horizontal exchange
took form in a variety of transnational projects, it long remained diffi cult to create effective
interlinkages with other national, but also supranational, levels. “Glocalization”, a
combination of global development and local action, has rarely worked out as well as it
has in environmental policy. Often the sense of a new beginning has remained restricted
297

to the capillaries of society, without generating pressure for change at the other levels
of political action. The political “garage mentality” of the world’s countless social laboratories
was simply not suffi cient to renovate the whole house. The danger in Europe in
particular was that “mobilized societies” tend to unravel into countless subpublics, with
local policy innovations taking on the characteristics of a conservative communitarianism
rather than spilling over at other levels. But in Europe civic discontent was directed
less at the political faits accomplis of national governments than at the European Union
itself. The EU in turn saw that the European project was threatened by the infl exibility
of the member states and the growing disproportion between local responsibility and a
European voice in international decision-making. As a result, the EU became the fi rst institution
to open its doors to numerous political experts and movements and to use electronic
forums to acquire huge amounts of political and technical expertise – for example,
from numerous still spry retirees in Europe’s aging societies – for its projects. The idea
has been to make more use of the numerous grassroots organizations as sensitive seismographs
of social development. The fi rst step must be seen in a number of often-criticized
and often-fl awed development projects on which donors, recipients, and potential
implementing agencies were now working together – as early as the preparatory phase
and on the basis of systematic organizational inputs provided by the EU.
The UN long ago abandoned the era of the world conference. While these conferences
served to create attention, they failed to contribute much to improving capacities
for collective action. Such conferences are now devoted to further expanding the network
of early-warning systems (above all for epidemics, environmental crises, and violent confl
icts), as well as to organizing individual global hubs and coalitions of the willing consisting
of governments, NGOs, and corporate representatives, which benefi t from the world
organization’s legitimacy. The UN also provides support for various regional bottom-up
initiatives – which foster cooperation processes in some subregions – hoping that they
will develop into important building blocks of global governance.
In the Linux Option the world remains a world of states, with hierarchies and power
differentials. It has also remained problematic to organize political involvement and democratic
participation outside the framework of the nation-state. NGOs are no replacement
for democratic decision-making processes, bloggers may well assemble their facts with an
eye to manipulation, and the political hype dispensed in the course of campaigns is seldom
translated into real policy. But today’s world is more decentralized and transparent, and
there is good reason not to underestimate the political impact that may stem from the creativity
of and control exercised by the many in the world’s different transnational political
spaces. Like fi ne threads, the communication lines now span the world of states, tempering
it, creating more and more channels for ideas and active participation. National governments
have remained the centers of power, but, like Gulliver, they have been restrained
somewhat and have come more and more to recognize that centralized and hermetic structures
cannot offer viable solutions for complex problems. Today more people are aware that
the world is networked, that people are reliant on one another; many people develop more
than one loyalty – to their neighborhood, for instance, or to transnational communities.
Two developments will prove crucial for the next steps on the agenda, namely fundamental
transformation of global governance and reform of the international institutions. In
the present scenario, creation of power – including micropower – or the capacity to reach
decisions in the face of complexity is predicated on access to information and possession
of the skills needed to initiate cooperation. To avoid further fragmentation, the only prac-
298

ticable approach to further modularizing global governance is to ensure that everyone has
unhindered access to information and knowledge, even where technical, social, or cultural
barriers remain. The building plan for the world must be made accessible to those who are
interested in further developing it. At the same time – and without succumbing to nostalgia
for the grand narrative – it will be essential for the various progressive political modules to
better concentrate their forces in realistic utopias for global development.
VII. “THE FUTURE IS UNWRITTEN”
“In the long run”, John Maynard Keynes correctly noted in view of the bewildering diversity
of economic forecasts, “we are all dead”. Before that, it might still prove worthwhile
to lend a hand in shaping world events, however. Imagining the future is a fi rst step toward
averting or realizing it. If we cannot predict the future, we can at least shape it. Looking at
our three scenarios, the main task facing international relations in the years ahead will be
to create and consolidate political trust and prevent the erosion of trust. Trust is the basis
of political and social action, it is the real mutual “security pact”. Certainly, it must not be
blind, and trust invariably remains risky and prone to disappointment. But in view of the
growing complexity often noted in international relations, the multifarious susceptibilities
and threat potentials it may involve, the only way to create the institutions and structures
needed to solve global problems is to tackle the troublesome business of building trust
and confi dence at all levels of politics. Trust is thus best created through integration, not
exclusion; by building bridges, not by opening up divides; by fostering the common good,
not by servicing special interests, be they religious, ethnic, or economic; through social
democracy; by giving precedence to civil preventative action over reactive approaches; and
by engaging in open political discourse rather than seeking to elude debate.
VII.1 Integration
Integration presupposes trust, but also serves more to deepen it than just about any
other political instrument. Without further EU integration, Germany will be virtually unable
to realize any of its foreign-policy goals in the years ahead. It is within the Union that
Germany has achieved its most important foreign policy successes since reunifi cation.
Political innovations from the laboratory of the “postmodern zone” (Robert Cooper) and
the determination to make of Europe something more than a European Hansa are required
if Europe is to obtain greater infl uence in world politics. But the will to forge ahead
with integration also implies not being forced into a barren debate on Europe’s fi nality
and the seeming contradiction between enlargement and deepening. The integration
process must remain open as a matter of principle, and the political projects of the future
should always be mindful of both: “Europe must work”, in a twofold sense – on the basis
of democratic and effective structures and through European political initiatives keyed
visibly to the social problems besetting European societies. Europe’s concrete borders
are not “natural” boundaries, and they have often been redefi ned in the past in keeping
with political exigencies. The prospect of accession is the EU’s most successful foreignpolicy
instrument, and it should not be rashly relinquished. This applies in particular to
Turkey, and Turkish accession in the medium term will prove crucial for the further economic,
sociopolitical, and security-related development of the EU. A stable zone of peace
299

and a dynamic and politically innovative Europe cannot fail to have spillover effects on
other regional projects in other parts of the world. Infl uential regional structures are both
the sine qua non for a “sound internationalism” (Boutros Boutros Ghali) and important
building blocks for a future global governance.
300
VII.2 Building bridges
In a world that has become more obscure, in which the boundaries between domestic
and foreign policy are becoming increasingly blurred, and world-political problems and
action are closely interdependent and intertwined, it is essential to build trust-based
networks at as many political levels as possible to reduce complexity and facilitate common
action. This can be achieved most sustainably by means of stabilization and the
construction of effective international organizations that reduce mistrust and alienation,
and in which partnerships are based on rules. Strong political partners and – above all
– a set of effective multilateral institutions are the two pillars on which the post-war successes
of German foreign policy have rested. Germany’s strategy, based on “intertwined”
or “institutionalized” interests – which have, however, to a considerable extent always
taken account of the interests of other actors and institutions – its stable relations with
the core countries of global development, and the trust it enjoys among the international
institutions constitute good preconditions, in view of the sad state of the international
institutions today, for developing new initiatives and building coalitions with a view to
implementing them. At the top of the agenda are the return of the US to the world’s multilateral
structures, integration of the large emerging countries, strengthening of the UN,
and the construction of comprehensive institutions in confl ict-prone areas – for example,
the energy sector – that presently lack them. In such a mediatory role Germany will need
to be predictable, reliable, but also fl exible and willing to learn, if it is to perform the occasional
balancing act in its European, transatlantic, or Eurasian relations (for example, in
its relations with Turkey, China, and the US). But the ability to meet global challenges, in
all their different manifestations, would presuppose that as many relevant actors as possible
are involved in the relevant policy networks. Bridges must therefore be built above
all between governments, labor unions, and NGOs, between businesses, parliaments,
and international institutions, between churches and societies. The special tasks of the
future will include approaches to dealing with the new elites in the Middle East and Latin
America, building intellectual and cultural bridges with the rising middle classes in the
emerging countries – which, while they already enjoy economic freedoms, still often tend
to embrace nationalist attitudes – and a dialogue of civilizations that regards cultures not
passively, in the sense of heritage, but as a potential for human creativity.
VII.3 On deck: The needs of a trading nation
Germany’s economic stability has always been closely linked with its political infl uence
abroad. And in the future as well, Germany’s economic weight will continue to be
a key defi ning factor in its infl uence in global politics. More than most countries, Germany
is thus wholly reliant on open markets and a functioning global economy. One of
its key tasks will be to engage in a creative external trade policy geared to cooperation
and integration. Further European integration will form the basis of this, in order to
shape a strong and dynamic economic bloc and to gain greater infl uence in international

forums with a view to making progress with reforms of the international fi nancial and
trade institutions. There is good reason to believe that the markets of the future will be
green. Efforts to position Germany as the “global environmental engineer” will open up
new market opportunities, and this will mean setting an appropriate course in economic
and innovation policy, developing ecologically sustainable systems of production and
consumption, and assuming a committed role in international environmental and climate
policy. Migration will prove to be another crucial economic factor. Only if Germany
accepts the need for continuous immigration based on transparent immigration regimes
will it (like most European economies) have a suffi cient labor supply in the years ahead.
However, economic pragmatism must not be understood to mean abandonment of principles,
and foreign trade policy must not be allowed to undercut credibility in other areas
such as human rights policy, confl ict resolution, or development policy. Finally, the time
has come to start to discuss and then implement a “new model of prosperity” (Ernst Ulrich
von Weizsäcker), one that is globalizable, but without leading to ecological disaster.
VII.4 Pax Pentagon: How best to promote and foster democracy?
Democracies are, among themselves, more peaceful, trustful, and open. More than
most other countries, Germany is politically and economically reliant on cooperation, and
for that reason democratization is one of the central goals of German foreign policy. But despite
the successes in democratization achieved in the past decades, there is still a danger
that the twenty-fi rst century may be the beginning of a new epoch of authoritarianism (Ralf
Dahrendorff). The expansion of liberal capitalism is forcing societies to engage in market
reforms, but not to commit to democratic forms of rule, and formal democracies threaten to
founder in the face of growing social polarization. In the future, an unmistakable rejection
of military-backed regime change should, more than it has in the past, go hand in hand
with efforts to formulate viable alternatives. In its own neighborhood Europe has already
proven that it is able to develop and apply the pressure needed for transformation. This
model can certainly not be transferred directly to other regions. One of the central tasks of
the European Union in the years ahead will therefore be to put together a comprehensive
democracy-promotion package designed to provide support for countries not on the list
of candidates for accession, but also, if need be, to exert pressure on them. Here the EU
must combine its present strengths – for example, in institution-building – with a focus on
improving the social situation in the countries concerned (for instance, as regards fair market
access) as well as with efforts to develop civil society structures. It will certainly make
sense not to overburden the strategy ideologically and also to develop approaches for dealing
with authoritarian states, but a policy of this kind must at the same time generate the
strong pressure needed to bring about transformation. Accordingly, relations should, more
than at present, be made subject to conditionalities, and this also includes the construction
of a regime of precise sanctions within the framework of the EU.
VII.5 Mind the gaps: Strengthening global equity
The security debates of recent years have increasingly masked the global development
dilemma, and this has meant paying more attention to the causes of war than to
the conditions of peace. But the global lines of confl ict continue to be defi ned by development
and underdevelopment, economic integration and social exclusion, participation
301

and political powerlessness. This development dilemma is at the heart of many of the
challenges outlined here, be it climate and the environment, migration, security, or democracy.
The debates on the social question, bearing on both distributive justice between
the world’s rich and poor countries and the alarming social disparities within societies,
will play a key role in shaping the future constitution of the world – particularly because
there is reason to believe that these debates will intensify in the years ahead. The late
development of the emerging countries – a process that is at the same time also producing
newcomers – will make life more diffi cult for the winners of globalization, the old industrialized
countries. Their own development model is now rebounding on them in the
form of growing competition for good and raw materials, but also in the form of climate
crises and other threats. Development problems are, in this sense, no longer only the
problems of the South. This could lead to the gradual realization that global development
is no longer to be had without a new development model. Viewed in a historical perspective,
it will make little difference whether globalization continues to boost the prosperity
of rich societies (or of the rich in poor societies). What will be crucial for the future development
of the world is it can be shaped in such a way as to help close the global gaps, the
increasingly visible social, economic, and technological disparities. Apart from poverty
reduction, development policy must work above all to temper and civilize confl icts, to
promote the rule of law, to bring about distributive justice, and to pave the way for political
participation. But what is needed – in the sense of a global structural policy – is the
will to intervene robustly in the dominant conditions of the global economy, as well as
new orientations in the relevant key institutions.
302
VII.6 In the crisis belt: Preventive confl ict management
The security issue, in all its facets, today defi nes social discourses. At the same time,
in no other policy fi eld have the premises and instruments of German policy changed so
much as in security policy. Having for years been a “front consumer” of security, Germany
has developed into a subordinate producer of security. But while participation in missions
abroad has now become a fi xed element of German foreign policy, development of
a systematic crisis-prevention strategy has not moved beyond its fi rst phase. The threshold
for military intervention has been lowered appreciably in recent years, and there is
a growing tendency on the part of many countries to exempt themselves from international
rules. However, the most effective, sustainable, and cost-effective security policy
continues to be preventive confl ict management broadly rooted in multilateralism.
None of the today’s central security challenges can be resolved exclusively by military
means, and the military component must play the smallest role in any security-related
problem: the most promising approaches for the medium term include diplomacy and
global regimes when it comes to disarmament, police and intelligence services, education
and social policy when it comes to terrorism, and sustainable state-building in cases
involving regional confl icts. In the years ahead, further development of a culture of prevention
must include efforts to strengthen arms control regimes, to revitalize the UN as
the world’s key confl ict mediator, to bring non-military transformation pressure to bear
on autocratic and crisis-shaken countries, and to further develop the German and European
crisis-prevention infrastructure. “When war begins, that we can know, but when
does the prewar begin? If there were rules they should be passed on. Transmitted in
stone, engraved in clay” (Christa Wolf, Cassandra).

VII.7 All together now: The interior furnishings of foreign policy
Hardly anyone would dispute that in recent years German foreign policy has found
itself with more policy space, but it is also expected to play a more active role on the international
stage, and the foreign-policy culture and institutions in Germany are going to
have to adjust to this new state of affairs. In political circles debate over foreign policy has
been a marginal phenomenon, and in practically no other policy fi eld has the permissive
consensus between population and political elite been so solid. While in the past foreign
policy decisions often moved ahead of public opinion, in the future the public will have
to be viewed more as a partner in the making of foreign policy. As the tasks, the visibility,
but also the (unavoidable) contradictions of German policy in international relations continue
to grow, the political actors involved will need the orientation that only social discourses
can provide. A greater need to justify foreign-policy decisions should be seen less
as a reason for nervousness than as a chance to better network political analysis, political
debate, and political action with a view to gaining more sustainable support for foreign
policy. Recognition of the public demand for such debates, the need to build a “strategic
community” with foreign-policy think tanks and NGOs, to bring about more transparency
in foreign-policy decisions, and the need for political actors who formulate their
goals and strategies and then put them up for discussion – this is the sine qua non.
The legislature’s – de facto limited – infl uence on foreign policy has in the past tended
to obstruct the debate. The claim, expressed again and again, that parliamentary procedures
are overly cumbersome has never been substantiated. On the contrary, there will
be a need in the future for national and European parliaments to become more involved,
to participate more when it comes to addressing foreign-policy issues.
Information and the skills needed to initiate cooperation are the resources of modern
power. This goes for Germany’s foreign-policy actors as well. Current challenges, including,
for example, crisis prevention, climate policy, and promotion of democracy, indicate
clearly that in the future what will be needed most of all in place of thinking in narrow
departmental terms and turf battles is networked cooperation on concrete tasks. While
in complex societies it is as good as impossible to eliminate the coherence problems and
inconsistent policies borne of the different foreign-policy models, interests, and strategies
of individual actors, they can be reduced. Sometimes we fi nd an exaggerated measure
of detailed coordination, sometimes a lack of clear-cut priorities and joint, targeted
problem-solving strategies. This is one reason why it seems important to ensure that
instead of getting bogged down in the technical details of implementation, institutional
reorganization is accompanied by efforts to further develop Germany’s role, strategies,
and goals in international politics. This would of course also presuppose a willingness to
make available the funds needed to implement a new course of this kind.
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304
THE EUROPEAN UNION: PROTAGONIST IN A
MULTILATERAL WORLD ORDER OR PERIPHERAL
POWER IN THE »ASIA PACIFIC« CENTURY?
Dirk Messner 1
This article authored by Dirk Messner was originally published by Friedrich-Ebert-
Stiftung, London Offi ce, London, 2007
As the world moves towards a multipolar power constellation with China and India
challenging the established US dominated west ern world order, Europe risks marginalization.
Europe should re act by promoting fair and effective multilateralism and developing
strategic partnerships with the rising powers of the 21 st century.
With 25 member states, 450 million inhabitants and a contribution to the world
GDP of 25 percent the European Union belongs among those actors which infl uence
global-governance processes and can help to deal with global problems. The EU articulated
its readiness to assume global responsibilities in the European Security Strategy
of December 2003. At the same time, European foreign policy is still in the process of
development. A common perspective on central global issues, as well as a defi nition
of panEuropean interests which must go beyond the sum of the interests of member
states remains to be attained.
In what follows, we shall fi rst list a number of fundamentally positive factors to
which the EU can appeal when going about the construction of its global-governance
capacities. Against these assets, however, we shall set a number of central weak points
which the EU must overcome if it is to gain in importance as a global-governance actor.
Furthermore, we shall sketch the consequences for the world order of the rise of China
and India. It is clear that the transi tion from a quasi-unilateral, us-dominated power
constellation to a multipolar one can lead to a creeping erosion of multilateral institutions.
Neither the »old world power«, i.e. the US, nor the rising global powers in Asia
are investing in the stabilization or even the further development of the multi lateral
order. At present the European Un ion is the most important actor in world poli tics that
is fi rmly pursuing a multilateral concept of the world order. The EU could therefore,
in the developmental phase of the multipolar power constellation, become the central
protagonist of an effective and fair multilateralism. However, this will re quire enormous
efforts on Europe’s part because there is nothing resembling a »senior partner«
by whose side the EU could stand as »junior partner« in the stabi lization and modernization
of the multilat eral global-governance architecture. The EU must be grown-up
about foreign policy and establish alliances for a world order based on compromise,
human rights, and cooperation – or it will become a peripheral region in an Asia-Pacifi c
century.
1 Prof. Dirk Messner is Director of the German Development Institute (DIE) and member of
the German Advisory Council on Global Change (WBGU)

FOUR STRENGTHS OF THE EU ON THE WAY TO BECOMING AN INFLUENTIAL
GLOBAL GOVERNANCE ACTOR
The EU can fall back on four assets when it comes to developing its global governance
capacities. First, the European Union has globally been ascribed the mostly positive
role of an international negotiating or civil power, which stands for the development of
a fair multilateralism. In comparison to the USA and other infl uential states, the EU is
perceived as a »benevolent actor« and a broker of confl icting interests (for example, in
the Middle East, in dealing with Iran) and a serious problem solver in important areas of
world politics (for example, as regards climate change).
Secondly, against this background the EU is helping to put a brake on rampant anti-
Western world views and perceptions which have gained impetus due to the Iraq war,
human rights abuses in Abu Ghraib, the erosion of human rights at Guantánamo Bay,
and the unilateralism exhibited by the Bush government. Francis Fukuyama in his most
recent book »America at the Cross roads« describes how after September 11, 2001 the
USA proceeded to damage its reputation as a »benevolent hegemon.« Charles Kupchan
(2003), adviser to the Clinton government on European politics, and Jeremy Rifkin (2004)
underline, in con trast, that in many parts of the world Europe enjoys trust which could
serve as a foundation for more effective international initia tives on the part of the EU but
also of the West in general. The EU therefore pos sesses moral capital which could be of
the highest importance in the translation of economic, political or even military potential
into legitimate global action.
Third, the EU is often reproached with mak ing only marginal contributions to stability
and security in the international system. The EU’s engagement in the successor states
of the Soviet Union, as well as – in particular – the process of eastern enlargement of the
Union, have contributed substantially to the largely peaceful trans formation process in
the former socialist countries. In this context the EU has made major political and fi nancial
investments in Europe’s stability and security and so also in that of the international
system, although this strategy has been controversial in many member states. The EU
should capi talize on these successes both internally and externally to make its mark as
an effec tive player in international politics.
Fourthly, the EU itself constitutes a kind of regional »laboratory for global governance«.
Multilevel politics between national states and the Union, the far-reaching juridifi
cation of its international cooperation (European jurisdiction), the bundling of »shared
sovereignties,« the continuous de velopment of common interests between the member
states, as well as the division of labor between national states, the quasi-supranational
EU Commission and the EU Parliament – that is, the complicated but unavoidable »governing
beyond nation states« – has been practiced in the EU for a number of decades. The
experiences ob tained in this way and the political habits handed down and internalized
in this proc ess represent for both the EU and the member states a political competitive advantage
which is not to be undervalued when it comes to helping effectively to shape the
development of the global-governance architecture. The EU is both the most advanced
and at the same time the most ambitious project of regional co operation in the world
and in principle an appropriate answer to the challenges of globalization, which are increasingly
giving rise to transnational sets of problems and necessitating cross-border
governance.
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306
FOUR WEAKNESSES ON THE WAY TO BECOMING A COOPERATIVE WORLD
POWER
However, a number of weak points must be set against these assets in terms of the
EU setting itself up as a cooperative world power. First, Europe’s only limited eco nomic,
technological, and scientifi c attrac tiveness in comparison with the USA (and in future
possibly also China and India) im plies a loss of »soft power« which should not be underestimated.
The capacity to act globally is based not only, perhaps not even principally,
on military power, but on top of that on political, economic, and cultural at tractiveness.
Europe can therefore in the future only become a relevant »cooperative world power« if it
simultaneously over comes its economic weaknesses and be comes a motor of innovation
in the world economy.
Secondly, despite the »European Security Strategy« of 2003 the EU has still not managed
to develop pan-European interests – which can even be opposed to individual national
interests – and, on that basis, common strategies for helping to shape the international
system, which can also with stand »heavy storms and a bumpy jour ney.« The crisis
of the EU in the run-up to the Iraq war showed that in diffi cult interna tional crises it is
still the nation states and their capital cities, not the EU, Brussels, for the European Council
of Foreign Ministers which ultimately are the relevant actors. The dispute between
some European member states concerning the reform of the Security Council last year
only strength ened this impression. The EU is the most developed regional cooperation
project in the world, but still »work in progress«: no longer merely the sum of nation
states, more than an association of states, but still clearly not a federal state of Europe.
More over, with the crisis of the European consti tution the project of a more effective common
EU foreign policy remains blocked for the time being. If this blockade and the loose
cooperation between the foreign poli cies of the member states, as well as of the Commission,
remains in place the EU’s global infl uence will ultimately remain very limited. Only
a common European foreign policy would provide the opportunity to play a major role
in global politics.
Thirdly, although the EU is regarded world wide as a »benevolent player« on the international
stage, at the same time it is con sidered a political actor which, in the con text of
the troubled further development of the European cooperation and integration project,
is preoccupied above all with itself, its complicated decision-making processes and its
confusing institutional structures. The breath-taking political and economic dynamics
in parts of Asia contrast with the often fi nicky and stolid machinery of the European
Union. And while the USA are reproached with exhibiting the hubris of power, the EU
must often give the appear ance of being involved internationally »with the handbrake
on.« Against Europe’s good international reputation overall must be set the not unjustifi
ed observation that the EU is still not a truly globally thinking and capa ble »cooperative
world power.«
Fourthly, the EU’s efforts to develop its global capacity to act continue to be undermined
by the internationally widespread image of »Fortress Europe«. Two things in
particular which contribute to this image of the walled-in fortress are, on the one hand,
the disputed immigration and migration pol icy of the Union which in the context of rising
refugee movements from Africa have gained in importance in recent months; and,
on the other hand, above all European agri cultural policy is a symbol of the protectionism
which infl icts great damage on the im age of a cosmopolitan actor with a far sighted

interest in global issues. For exam ple, Europe’s intransigence on agricultural questions
in the negotiations with Mercosur on a free trade zone have harmed Europe’s standing
in South America.
This sketch of the EU’s strengths and weaknesses shows that it has a good starting
position from which to gain signifi cance as a global power without giving rise to
in ternational worries about an aggressive Europe, or one solely orientated towards its
own, narrow interests. On the other hand, the economic, political and institutional construction
work is visible on which the EU must build in order to translate its global-governance
potential into an effective ca pacity to act.
THE EU NEEDS A STRATEGY FOR DEALING WITH THE RISING POWERS OF
CHINA AND INDIA
China and India are developing into signifi cant global-governance actors which are fundamentally
changing the basic pattern of the world economy and politics. We are cur rently
witnessing a transition from the qua siunilateral »western world order« domi nated by the
USA to a multipolar power constellation in which the two Asian coun tries – the most populous
in the world – play a central role (Humphrey/Messner 2006). The European attitude to
the two ris ing Asian powers will in future be as impor tant as transatlantic relations. Clearly
China and India are giving rise to tectonic changes in the world economy:
– China’s share in US imports rose from »virtually nothing« in 1985 to 15 per cent in
2004.
– Chinese exports rose from USD 50 billion in 1990 to USD 772 billion in 2005, making
China the third largest trading na tion in the world; the forecast is that by 2010 China
could become the largest ex port economy in the world.
– China’s share in world demand for important base metals has risen from 5–7 percent
to 20–25 percent since 1990.
– China currently holds the second largest (after Japan) currency reserves in the world,
at USD 900 billion.
– Since 2003 China has been the second largest energy consumer and emit ter of CO 2 in
the world.
– Between 2002 and 2004, 723 strongly R&D-based, that is, technology in tensive direct
investment projects were re alized in China. That corresponds to 41 percent of all
investment projects worldwide in this area: in the course of the last decade 700 technology
centers have been estab lished in China by foreign companies and around 100
in India – the Asian low-wage economies are therefore gradually becom ing motors of
innovation for the world econ omy.
– After decades of falling prices for primary goods the terms of trade for raw materials
and agricultural goods have been going in the opposite direction since 2001 due to
demand from China and India.
India fi nds itself on a similar economic path to China but with a 10–15 year lag (Müller
2006; World Bank 2006). If the catch-up processes of the two Asian giants continue India
would play a similar role in 2020 as China does now – and both together would signifi -
cantly change the world economy.
The economic dynamics of China and India are taking the form of increasing initiatives
and interventions by both countries in the most varied areas of world politics (Kap-
307

linsky 2006; Humphrey/Messner 2006). Owing to the enormous demand for re sources
and energy the Asian giants are pursuing active strategies to secure raw materials and
energy sources in Africa, the Middle East, Latin America, and the Cauca sus – in competition
with the USA and the EU. China and India also have to take a position regarding
climate policy given rap idly increasing CO2 emissions: their stance in relation to Kyoto
Phase II will be as im portant as that of the US government; China and India are participating
in the »climate initiative« launched by the Bush government which seeks to avoid
putting upper limits on CO2 and instead to encour age technological innovations; China
is en deavoring, in the Shanghai Cooperation Organization (China, Russia, Tajikistan,
Khirgizstan, Uzbekistan), to harmonize its raw materials and energy policy with Rus sia.
Within the framework of the two nego tiations in Cancún, the G-22, led by India and Brazil
and supported by China, showed the industrialized countries the limits of their trade
policy power. India has joined forces with Brazil and South Africa to form a G-3 of the
south in order to be able to act more effectively against the G-7/8 of the north.
The trend in the global-governance archi tecture is therefore an enormous pressure for
adaptation – a new global power con fi guration is emerging. It can scarcely be imagined
that the UN, the G-8, the WTO, the Bretton Woods organizations, and the climate regime
will look the same in 2020 as they do in 2006. The decisive question is whether China
and India, on the analogy of their remarkable economic and technologi cal catch-up processes,
will also, as global-governance actors, be able to go through similarly rapid political
learning processes, and what models they will emulate in world politics.
The rise of China and India not only means that two more actors will become players
in world politics. The transition from a unipolar to a multipolar power constellation
implies a radical change to a new world order. This new multipolar power constellation
and the resulting competition for power and infl u ence in world politics in the coming
two or three decades will turn into the central and decisive line of confl ict in the global-governance
architecture – similar to the system confl ict during the Cold War or the
drawn-out confl ict between the European central powers before the First World War. In
the past, extreme shifts in power in the international system, the »rise and fall of great
powers« (Kennedy 2000) were ac companied by long periods of instability and confl ict.
One of the forefathers of geo politi cal thought, Mackinder (1904), argued that the great
wars of history as a rule were the direct or indirect consequence of unequal development
between nations. The some what martial title of a contemporary publica tion on power
shifts in the world economy in favor of Asia, »Weltkrieg um Wohlstand« [World War
about Prosperity] (Steingart 2006), shows that Mackinder’s analyses still fi nd their adherents
after 100 years. Also, many neorealist authors consider military confl icts between
rising and declining hege monic powers as almost inevitable. The de cisive question is
therefore whether the conceivable rise of China and India to be come potential great powers
in the coming decades, the accompanying relative loss of power of the USA, and the
possible decline in the importance of European nation states will lead to a renaissance in
the »power ri valries of great actors« and possibly even to violent confl icts. Theoretically,
fundamen tal shifts in power could result in three con stellations: »war, cold peace (stability
based on competition and mutual deter rence), or warm peace (stability based on
cooperation and mutual reassurance). War is the historical norm; most power transi tions
lead to violent confl ict« (Charles Kup chan 2001, 7).
Should it not prove possible to gradually in tegrate China and India into a system of effective
multilateralism, the new multipolarity could escalate into an unbridled power strug-
308

gle between the USA, China, India, and possibly the EU, giving rise to instabil ity, confl ict,
and constant turmoil – thereby tying up energies which are urgently re quired to deal with
the dark side of global ization (poverty, destruction of the environ ment, climate change,
state collapse). This sketch of global power shifts in the direction of Asia clearly shows that
the EU cannot confi ne itself to an incremental develop ment of its global-governance approaches
but needs a »grand strategy« to take ac count of radical global change.
While the US have been concerned with dynamics in Asia for some time German
and European thinking is ultimately still strongly shaped by a transatlantic world or der.
For example, in the European Security Strategy of 2003 Asia, China and India are only
of marginal concern. This overlooks the fact that in the coming decades Europe could
fi nd itself marginalized in world poli tics if it fails to develop its global-governance capacities
energetically. What is certain is that in the future all European nation states,
in comparison with the USA, China and India, will be minor actors with quite limited
power resources. The EU will therefore end up at the periphery of world politics if it does
not fi nd common solutions to these challenges. The EU has often been capable, under
considerable external pres sure, of great reforms: for example, the breakdown of the Eastern
bloc and German reunifi cation became the motor of the Euro pean monetary union.
Perhaps the dynamic of change emanating from China and India will force acceleration
in the development of a globally oriented European foreign policy.
The point of departure of such a strategy may not be the question of whether China
and India will become powerful actors, but how they will deploy their growing power.
From a European perspective three ele ments are of particular importance:
– Europe’s role could be to act as a cata lyst and main protagonist of a fair and effective
multilateralism which will in creasingly come under pressure from the threatening
»competition of the great powers.«
– Europe must test and adapt its strate gies in the global-governance arenas particularly
affected by the rise of the Asian powers.
– Europe must develop strategic partner ships with China and India without ne glecting
relations with the USA.
THE EU AS CATALYST OF AN EFFEC TIVE AND FAIR MULTILATERALISM … AS
MULTILATERAL POLITICS COMES UNDER THREAT?
Against the background of refl ections on the radical change from a uni-to a multipolar
power constellation it is clear that a de velopment in the direction of a cooperative global-governance
architecture, character ized by a fair multilateralism, will in no way take
place of its own accord but rather re quires great political efforts from the global actors
concerned. If this process should fail the consequence will be a revival of »com petition
between the great powers«: »The choice … is between an effective multilat eralism and
either a gradual return to a world of great power competition or a world overwhelmed by
disruptive forces or both« (Richard Haass 2005, 17).
In this context Europe should play a major role, on the one hand to fulfi ll its role as
im portant protagonist of a multilateral political approach, and on the other hand to take
advantage of the potential following wind that could arise from the EU being globally
ascribed the role of an international actor inclined (primarily) towards compromise. If
Europe managed to be effective in this de manding sphere the EU could assume a key
309

ole in the transition from the uni-to the multipolar power constellation, and con tribute
to limiting confl ict and ensuring sta bility in the international system.
In order to tackle such a task the EU has to develop strategies to overcome the traps
emerging for multilateralism in the transition to multipolarity. Three mechanisms are
im portant here.
IT WILL BE HARD FOR THE SOLE SUPER POWER TO SAY GOODBYE TO »GLOBAL
DOMINANCE«
It is generally diffi cult for superpowers to switch from a strategy of »global dominance«
to a concept of »global or even shared global leadership. « This currently applies
to the USA, as the renowned US academic and foreign policy adviser to a series of US
presidents Brzezinski argues. Brzezinski (2004, 216) fi rst cites Peter Bender (2003, 155)
who compares the cur rent power hubris of the US superpower with the dominance of
the Roman Empire: »World powers without rivals are in a class of their own. They accept
no one as their equal and are quick to describe loyal fol lowers as their friends or amicus
populi Romani. They no longer fi ght, they only punish. They no longer engage in wars,
they only create peace. They are genuinely indignant when vassals do not act as vassals.«
Brzezinski shares Bender’s view and adds: »One is tempted to add that they do not invade
other countries, they only liber ate. The author wrote this before Septem ber 11, but
his observation applies amaz ingly well to the stance of some US political decision-makers«
(Brzezinski 2004, 216). Brzezinski is right – and hence, also under a Democrats-led
government, the US will not do much to promote the stabilization or further development
of the multilateral sys tem. The EU should therefore hone its for eign policy profi le
in this direction– not as junior partner of the USA but as main insti gator.
THE ESTABLISHED »TRANSATLANTIC MULTI LATERALISM« OF THE TWENTIETH
CENTURY NO LONGER APPLIES
A further central challenge consists in the fact that the »fair multilateralism« of the future
cannot just follow on from the »West ern« or »transatlantic« multilateralism of re cent
decades. This is being undermined by the following dynamics:
– The unilateral attitudes of US for eign policy in recent years, to the persis tence of
which Brzezinski draws attention.
– The limits of classical international multilateralism which have become clear due to
the increasing signifi cance of private actors (multinational corporations, NGOs and
other civil society actors), as well as the growing complexity of globalization, all of
which require a degree of political control beyond the nation state which is too much
for the existing international organizations: the crises of the »inclusive global governance
arenas« (such as the WTO, the UN, the Kyoto process) and the increasing signifi
cance of exclusive forms of »global gov ernance in clubs« (trend towards bilateral
trade agreements; alliances against the Kyoto process; upgrading of the G-7/8 in stead
of using the UN as the nucleus of global cooperation; the coalition of the will ing in
Iraq) are indicators of the weak nesses of the established multilateral sys tem.
310

– The rise of China and India which is signifi cantly shifting global power constella tions
and eroding the project of an ulti mately transatlantic-controlled multilateralism.
Multilateralism must therefore be rein vented. The EU should make substantial efforts
to contribute here. However, at the moment the relative weaknesses of Euro pean foreign
policy are only reinforcing the vacuum left by the USA in international or ganizations.
USA, CHINA, INDIA: CLASSICAL CON CEPTS OF THE STATE, POWER, AND
SOVER EIGNTY ARE SHAPING WORLD POLITICS
In China and India classical concepts of sovereignty, power, and the nation state
dominate the thinking of large sections of the political elite, even if these states make use
of a multilateral rhetoric. These per spectives derive not least from the percep tion in the
»rising countries« that their na tional trading potential and infl uence in world politics are
at present rather increas ing than eroding. The perception in Europe goes precisely in the
opposite direction. In the EU the decision-makers are gradually learning, in the context
of the globalization debates, that with regard to the limited scope of national politics and
the growing importance of global interdependences the delegation of sovereignty, for
example, to the EU, the bundling of national governance and steering capacities through
interna tional cooperation and the modifi cation of the concept of non-intervention (for
exam ple, when it is a matter of protecting human rights as against non-intervention in
internal affairs) are necessary reactions to maintain ing political capacities to act and
solve problems in a globalized world. It is interest ing that China and India’s classical
under standing of sovereignty, power and the state concurs with the political thinking of
the current US government. The idea that »multilateralism is a concept for weak states,«
as neoconservative Robert Kagan tried to explain to Europeans in the Iraq de bate, fi nds
plenty of adherents in the rising Asian powers, too.
Against this background it is becoming clear that the EU is at present and in the immediate
future the most infl uential actor when it comes to the stabilization and »re invention«
of multilateralism. This is not necessarily good news for the future of mul tilateralism because
it is questionable whether the EU can perform this role. Cer tainly it must develop
a fundamentally new self-understanding as a world-political ac tor. It is a question of outgrowing
the estab lished model of the EU as the junior partner of the USA or even of a partner
on »almost the same level« as the USA and taking on the role of a, probably the central
motor of a revival of multilateralism, if Europe wants to stick to the concept of an effective
and fair multilateral world order. Whether Europe is capable of such a show of strength
remains to be seen. If such a reorientation does not succeed not only a creeping erosion of
mul tilateralism is to be feared, but also Europe’s probable relegation to the periph ery of an
Asia-Pacifi c world order shaped by the USA, China, and India.
INITIATIVES TO STRENGTHEN AND MODERNIZE MULTILATERALISM
The EU should make it clear to the central global players, but especially to the »medium
sized« anchor countries such as Bra zil, Russia, South Africa and Indonesia, that
although multilateral organizations have weaknesses (which must be identifi ed and
worked on) there is no alternative. Europe must become a point of crystallization for a
311

»coalition of the willing« for further devel opment of the global-governance architec ture.
The point of departure of such a coali tion must be the central argument that an institutionally
(through the UN, the WTO, the Bretton Woods organizations, and so on) ineffective
global power competition in the transition from a quasi-unilateral to the multipolar
world order would be dangerous and irresponsible. A US empire will as little be accepted
by the international community as a conceivable Asian one. An author not known as an
enthusiast for multilateralism such as Martin Wolf (Financial Times, June 14, 2006) is
right when he writes: »The world will not accept the US (or any other power) as Master …
The (global) institu tions are central … and must be made to work.« Without the cooperation
of those with the capacity to act this will not happen. And it speaks well for this that
Europe (in cooperation with other actors) could and should assume this role by means of
effec tive initiatives to persuade the USA, China and India to take this path – because the
three central powers will for the foreseeable future be preoccupied primarily with their
reciprocal power wrangling. Ultimately, from the European perspective it is a matter of
promoting an international system charac terized by structures and rules that secures
for Europe, which is losing power relatively (in respect of Asia), possibilities for exert ing
infl uence in the world order of 2025.
312
GLOBAL- GOVERNANCE ARENAS
The EU must in particular launch initiatives in the global-governance arenas, in
which, due to the rise of China and India, power parameters and development dynamics
have signifi cantly changed and trends are emerging which run counter to European interests.
In addition, in all areas in which relevant world problems cannot be solved without
the involvement of China and India the EU must develop cooperation and inter vention
strategies in relation to the Asian giants. As examples we can cite three ar eas of global
governance: 2
Climate, energy and sustainability policy is increasing in signifi cance: climate change is
becoming one of the critical international problems of the coming decades because it
will be scarcely possible to achieve the goal of two degrees being pursued by the EU (as
the upper limit of the rise in global tem perature) without great efforts in terms of climate
policy, corresponding socio economic and security policy conse quences of far reaching
climate change (WBGU 2007). China is already responsible for 16.5 percent of global
CO 2 emissions and India for four percent (Germany 3.5 percent). By 2025 and 2050 the
Chinese share in worldwide carbon dioxide emis sions could be 25 percent and 40 percent
respectively.
China’s energy requirements will approxi mately double by 2015, while India’s energy
consumption will increase by around 50 percent. This hunger for energy can only be satisfi
ed in both countries by growing im ports. China already imports 45 percent of its oil
needs; in 2030 the import share is expected to be around 75 percent. Since the world’s
energy reserves are predomi nantly in crisis regions such as the Middle East, the Caucasus,
Africa, and Russia, in ternational stability and security will depend not least on how the
USA, China, India and the EU will handle their future competition for energy resources: In
an institutionally regulated and moderated way or in an in creasingly confl ictive way which
2 Security policy challenges in the narrow sense (Iran and North Korea crises, fi ght against
terrorism) will not be discussed. See Bergsten et al. (2006, 118 ff.).

could trig ger off or accelerate regional destabilization processes. The current arguments
between the West and China about the close rela tions of the Asian giant with the governments
of Sudan, Iran, and Venezuela clearly show the enormous confl ict potential in competition
for global energy resources. The topic of sustainability which has been neglected
for the last decade will become a central topic of world politics again due to the enormous
energy requirements of China and India, as well as the inability of the OECD countries so
far to improve their energy and climate balances. If efforts to wards global sustainability
fail a revival of geopolitics and confl icts about energy re serves, resources, and the costs of
climate change will shape the future of the interna tional system.
The EU has crucial signifi cance, particularly in the Kyoto II process. It will be important
to lead China, India and also Brazil gradu ally to take responsibility for CO2 reduction. At
the fi rst attempt it probably won’t be pos sible to commit these states to quantifi ed CO2 reductions,
but it is conceivable to ne gotiate with China and India about signifi cantly increasing
shares of renewable en ergy in their national energy supply, and also to launch energy
policy partnerships with the world’s fastest growing economies, geared to mutual benefi t.
Challenges in international development policy: the infl uence of Western (and also European)
development policy is based on the combination of the fi nancial power of the donor
countries, their attractiveness as strong and prosperous economies, and their ability
to set the international agenda for development policy. There is a lot to suggest that these
three pillars of the su premacy of the industrialized countries in international development
cooperation could gradually be eroded due to the new role of China and in future
also of India. This dynamic also affects European devel opment policies.
First, China is still not challenging the fi nan cial hegemony of the Western donor
states in international development cooperation, but on the basis of its high foreign currency
reserves the Chinese government is in a position to change the development policy
map. At the beginning of the decade Angola preferred a USD two billion credit for infra-structural
investment from China to an offer from the IMF – at a lower interest rate
and without the usual governance conditions of the Washington organization. In return
China secured access to the Angolan oil in dustry. Worries that China’s increasing involvement
in development policy could lead to the erosion of the environmental, social,
human rights and governance standards established by the Western donor countries is
entirely justifi ed given China’s close co operation with »diffi cult partner countries, « such
as Zimbabwe, Sudan, and Algeria.
Second, some observers confi rm that China is gradually increasing its »soft power potential«
on the basis of its economic and cultural attractiveness and political leader ship
capability. In Africa and Latin America China has become an important economic, but
also political actor in the last decade. In Asia, Japan has lost its role as leading na tion to
China. An EU report on Europe’s strategic interests with regard to China em phasizes:
»In the last fi ve years the percep tion of China in Asia, particularly South East Asia, has
changed. The region looks to China as a source of ideas and innovation. That is new«
(Eias – Nomisma 2005, 31).
Third, China has implemented a develop ment strategy which is congruent with neither
the earlier Anglo-Saxon (post-) Wash ington consensus, nor the concept of the »social
market economy.« Instead of a free or social market economy, democracy and the intervention
of the industrialized coun tries in the internal affairs of development countries
(human rights, good governance), China is oriented towards a concept of a planned market
economy, authoritarian rule and the principle of nonintervention in inter nal affairs.
313

In Africa, Latin America, and Asia this »Beijing consensus« (Ramo 2005) is increasingly
fi nding followers, not least in relation to the failure of many structural ad justment programs
initiated by the World Bank and the IMF since the 1980s, and Chinese economic
advisers are fi nding lis teners who are interested in the basis of the economic miracle of
the Middle Kingdom. The to a large extent unrestricted agenda setting capacity of the
Western world since the end of the East-West confl ict is being challenged.
EU development policy must accommodate itself to this new competition which is
emerging because China and India are gradually developing into new donor coun tries. It
should set itself the goal of convert ing Europe’s (EU plus member states) con tributions to
global Offi cial Development Aid (ODA) investments in the amount of around 55 percent
into corresponding European development policy infl uence. Through a clear division of
labor between the devel opment policies of member states and the EU Commission, as well
as a bundling of the votes of the European members of mul tilateral organizations in around
ten years it might be possible to have the same political weight in global development policy
as the World Bank does today. No European na tion state can bring about such a political
quantum leap, yet the EU – given the politi cal will – would be in a position to do it.
Challenges in global innovation systems: the EU’s global-governance strategies de pend
on Europe’s economic and techno logical attractiveness. The position of Euro pean countries
in global innovation compe tition is therefore the reverse side of the po tential global
infl uence of European policy. Innovation activities in the world economy have for decades
been concentrated in the Western industrialized countries. Japan’s modernization
drive since the 1960s, as well as processes of catch-up industrializa tion in medium-sized
economies such as South Korea and Taiwan have modifi ed this picture and added an
Asian innovation pole to the two innovation poles of the USA and the EU, although the
hierarchy within the global innovation system has not funda mentally changed.
If China and India manage in the coming two decades to achieve the transition from
primary labor-intensive production for the world market to knowledge and technology
based production as successfully as South Korea and Taiwan in the 1970s and 1980s,
such a process, given the size of these two economies, would lead to a radical shift in global
innovation activities. The fi rst signs of that are visible: India has above all some interesting
innovation poles based on the new communication technologies (the »Bangalore
phenomenon«); in China im pressive industrial learning processes can be observed; both
countries are investing more than the average in research, devel opment, and technological
education. The decisive question here is whether in the coming two decades the two
Asian drivers of global change become, due to their size, signifi cant innovation actors at
the interme diate level of complexity or poles of innova tion in which global state-of-the-art
tech nologies are driven forward (Altenburg 2006). For example, the Chinese govern ment
has expressed the ambition in future to be among the pioneers in the develop ment of
renewable technologies in order to help shape the transition of the global en ergy system
from the fossil era to renew able energies. The Indian government is in vesting in building
up a competitive advan tage in IT-based service sectors. If China and/or India manage to
advance to world leadership in a signifi cant number of tech nological fi elds Asia could
become the new innovation centre of the world economy.
From a European perspective these dy namics yield a multitude of opportunities and
risks. One thing is certain, Europe’s current level of prosperity and the EU’s po sition in
the global-governance architecture can only be ensured in the long run through a great
innovatory drive in the European economic area. On the one hand, techno logical catch-up
314

processes in Asia imply growing export markets for European sup pliers of technology and
knowledge, while on the other hand innovation competition is increasing worldwide so
that Europe must defend its role as an important innovation pole in the global economy.
Both, the EU and European enterprises, universities and R&D institutions must develop
strategies towards China and India in order to profi t from the technological dynamic of the
Asian drivers – also in the interest of an infl uential role for Europe in world politics.
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Ramo, Joshua (2005): The Beijing Consensus, For- eign Policy Centre, London.
Rifkin, Jeremy (2004): Der Europäische Traum. Die Vision einer leisen Supermacht, Frankfurt/New
York.
Steingart, Gabor (2006): Weltkrieg um Wohlstand. Wie Macht und Reichtum neu verteilt werden,
München/Zürich.
wbgu (2007): Klimawandel als Bedrohung für die in ternationale Sicherheit, Berlin (forthcoming).
World Bank (2006): China and India. Learning from Each Other, Washington.
This article was fi rst published in the FES publication International Politics and Society I/2007. Please refer
to http://www.fes.de/internationalepolitik for further information on this publication.
315

316
ON THE WAY TOWARDS A EUROPEAN ARMY
Hans-Peter Bartels
This article authored by Hans-Peter Bartels was originally published by Friedrich-
Ebert-Stiftung, London Offi ce, London, 2007
SPD Members of the German Bundestag have laid out a plan for the further development
of the military dimension of European Foreign and Security Policy. It envisions a series of
concrete steps for the deepening of military cooperation in Europe. In the long run, these
steps could open up the way to the creation of a European army. 1
The European Union has 27 member states, 490 million citizens and accounts for a
quarter of the world’s gross national product, making it far more than a confed eration
of states: the EU is a global player. The European Union’s political and eco nomic signifi
cance entails the responsibility of making an appropriate contribution to wards the
resolution of confl icts, including those located beyond its own continent. The European
Union can, and must, con tribute towards building a freer and safer world.
A common foreign, security and defence policy is necessary in order to give Europe a
voice. Europe must act as a single entity if it wishes to be recognized alongside the United
States and the growing powers of China and India.
The European security strategy, passed at the Brussels summit of December 2003,
forms a good mutual basis for new im pulses in the area of security and defence policy.
EUROPE’S RESPONSIBILITY AND POSSIBILITIES
The European Union is characterised by a great diversity of historically rooted foreign
policy and security traditions. The defence policies of the individual member states display
substantial differences, in areas such as strategic planning, equipment, structure of
the forces or in leadership style.
But there are more factors uniting than di viding us. Europe shares a common set of
European values. The Treaty establishing a Constitution for Europe, for which the ratifi -
cation process should be continued, formu lates the fundamental convictions guiding the
states of Europe:
“The Union is founded on the values of respect for human dignity, freedom, democracy,
equality, the rule of law and re spect for human rights, including the rights of
persons belonging to minorities. These values are common to the Mem ber States in a
society in which pluralism, non-discrimination, tolerance, justice, so lidarity and equality
between women and men prevail.” (Article1-2)
“In its relations with the wider world, the Union shall uphold and promote its val ues
and interests. It shall contribute to peace, security, the sustainable deve lopment of the
1 The paper has been written by members of the SPD parliamentarian party’s working groups
on Europe and defence questions in the Bundestag: Hans-Peter Bartels, Jörn Thießen, Ursula Mogg,
Steffen Reiche, Andreas Weigel, Michael Roth, Rainer Arnold, Gerd Höfer, Petra Heß.

Earth, solidarity and mu tual respect among peoples, free and fair trade, eradication of
poverty and the pro tection of human rights, in particular the rights of the child, as well as
to the strict observance and the development of in ternational law, including respect for
the principles of the United Nations Charter.” (Article 1-3, paragraph 4)
Europe stands for a security policy which is based on values, is not restricted to the
military, acts multilaterally and is dedicated to upholding and further developing international
law.
The security environment in which the members of the European Union wish to attain
common goals has changed radically since the end of the Cold War.
There are no longer any specifi c security problems or threats for Germany or France,
Denmark or Poland. Germany, at the centre of Europe, is no longer surrounded by ene mies,
but by NATO partners and EU mem bers. The classic scenario of national de fence, a major
attack on Europe with ar mies of tanks and fl eets of bombers, has become improbable.
In Europe today we fi nd ourselves con fronted with new dangers which do not stop at
national borders. These new strategic threats are “international terrorism”, or more precisely
fundamental Islamist terror di rected against “the west” on principle, the spread of
weapons of mass destruction and missile technology, the instability generated by regional
confl icts and so-called failed states, and the dangers resulting from or ganised crime
– because this too has an “external dimension”: traffi cking in weap ons, drugs and human
beings, links with in ternational terrorism.
These dangers do not threaten specifi c in dividual countries in Europe – they threaten
us all. For this reason we have to fi nd common solutions to these challenges.
National armies within an increasingly strong, supranational EU will gradually develop
into relics of the last century. In com parison with the United States our 27 ar mies
(with a total of around two million sol diers) are expensive. The European Union spends
around 160 billion euros each year in this area, and we have to employ these resources
more effi ciently. The states of Europe are also united in this respect: whilst having to
adapt our forces to the new challenges, our fi nancial leeway is limited. For this reason a
better bundling of re sources and capabilities is defi nitely an ur gent requirement.
We should build on the successes of the European unifi cation process, and as an
expression of our common security inter ests we should have the courage to initiate a
development at the end of which we have a European army.
WHERE WE STAND TODAY
The idea is not as new as it might at fi rst appear. In 1954, nine years after the end of
World War II, an attempt was made to form a European defence union. It was probably
too early.
So now, half a century later, when we em bark on a process towards developing a joint
European army, we are not starting from scratch. Especially in the fi fteen years following
the end of the division of Europe, in other words since 1990, the EU has made great
progress in closer cooperation on security and defence policy. Step by step, we have
steadily advanced, even if from time to time our achievements are ob scured by talk of
crises and widespread Euro-scepticism.
The hesitant beginnings of European Politi cal Co-operation (EPC) in the 70s devel oped
into increasingly intense coordination in foreign policy and security questions within the
framework of Common Foreign and Security Policy (CFSP), which was in troduced with
317

the Maastricht Treaty (1993) and further developed with the Amsterdam Treaty. At the
turn of the century the Euro pean Security and Defence Policy (ESDP) extended the CFSP.
The “European Coun cil declaration on strengthening the com mon European policy on
security and de fence” in Cologne of June 1999, which came about under German council
presi dency, marked the development of ESDP as an integral part of CFSP.
At its meeting in Helsinki in December 1999 the European Council agreed on the “European
Headline Goal”. This goal enables the Union to mobilise up to 60,000 soldiers within
60 days to meet the requirements of all of the “Petersburg tasks” (humanitarian and rescue
operations, peace-keeping mis sions, military action in crisis management including peacemaking
measures). How ever, these task forces remain a national responsibility; their provision
and deploy ment are based on a sovereign decision of the member states.
In the following years new committees were created to strengthen the common policy
(including the Political and Security Com mittee [PSC], the EU Military Committee), and
arrangements for cooperation with NATO were settled in the “Berlin Plus Agreement”
of 2003.
The Feira European Council of June 2000 confi rmed that ESDP could only be successful
by not restricting itself to the military sphere. Instead, it should also include
civil ian components. The mixture of civilian and military resources, together with the
convic tion that contemporary threats are not ex clusively of a military nature and can
thus only be met by a combination of instru ments, is a trademark of European politics.
By developing equal-ranking civilian and military capabilities for international crisis prevention
and crisis management the EU is making allowances for the broader con cept of
security and the new types of pre sent-day threats.
The “European Security Strategy” (ESS), which was approved in December 2003 by
the European Council in Brussels, is the fi rst EU document to describe common challenges
and name common interests.
Meanwhile the EU has successfully carried out its fi rst military operations. In Macedonia
the Concordia mission took place from March to December 2003 under EU leadership
after taking over responsibility from NATO. This mission made an impor tant contribution
towards peacemaking in the country. The fi rst autonomous EU op eration was the
Artemis mission from June to September 2003 which aimed at stabilis ing unrest in the
Congolese province of Bunia. After the operation’s successful completion responsibility
was handed over to the United Nation’s MONUC mission. In 1999 in Bosnia-Herzegovina
the EU took charge of the Althea mission, replacing the NATO’S SFOR mandate. In autumn
2006 the EU’s EUFOR RD CONGO mission suc cessfully backed up the fi rst free
elections to be held in Congo for over 40 years. In addition to this there have been several
ci vilian operations, such as the EU police mission Proxima (civilian back-up operation in
Macedonia) or the EU police mission EUPOL Kinshasa designed to support the redevelopment
of the police force in the Democratic Republic of the Congo.
The agreed development of combined European Battle Groups for crisis interven tion
purposes marks an important step to wards integrating national military forces into future
European security structures. Germany is actively involved in putting the concept
into practice. The system’s practi cability will be continually monitored. Initial experiences
with the envisaged system of guaranteed provision of specifi c units for prescribed
periods have to be carefully ana-lysed in order to develop it, if and when necessary.
The Treaty establishing a Constitution for Europe, signed in October 2004 and whose
ratifi cation is currently on ice, provides for the further development of ESDP. By creat ing
the European Defence Agency the EU members have brought forward a key ele ment of the
318

constitutional treaty. The new agency’s role is to improve European col laboration on equipment
planning, provi sion, research and technology, and to cre ate greater coherence.
The European Union already displays ele ments of a collective security system, similar
to the United Nations and NATO. The constitutional treaty’s provisions on com mon
security and defence policy also in clude an obligation to mutual assistance:
“If a Member State is the victim of armed aggression on its territory, the other Member
States shall have towards it an obligation of aid and assistance by all the means in
their power, in accordance with Article 51 of the United Nations Charter. This shall not
prejudice the specifi c cha racter of the security and defence policy of certain Member
States.” (Article I-41, paragraph 7)
In addition to this the negotiated constitu tional treaty contains a solidarity clause:
“(1) The Union and its Member States shall act jointly in a spirit of solidarity if a
Member State is the object of a terrorist attack or the victim of a natural or man-made
disaster. The Union shall mobilise all the instruments at its disposal, inclu ding the military
resources made avai lable by the Member States, to:
(a)
— prevent the terrorist threat in the terri tory of the Member States;
— protect democratic institutions and the civilian population from any terrorist at tack;
— assist a Member State in its territory, at the request of its political authorities, in the
event of a terrorist attack;
(b) assist a Member State in its territory, at the request of its political authorities, in the
event of a natural or man-made di saster.” (Article I-43)
The solidarity clause was activated after the terrorist attacks in Madrid in March
2004, although it is only politically, and not legally, binding until the European Constitution
ac tually comes into effect.
THINGS ALREADY FUNCTIONING
Integration of the European armed forces has long since begun. Numerous initiatives
point in the right direction. In recent years there have been several good examples of
closer cooperation between the EU part ners, also partially within NATO:
– the German-French Brigade was al ready founded in 1989,
– the Eurocorps in Strassburg (Ger many, France, Belgium, Spain, Luxemburg),
– the European Airlift Centre in Eindho ven, developed from the European Air Coordination
Cell which was founded in 2001,
– the German-Dutch Corps based in Münster (1995),
– the Sealift Coordination Centre (2003): nine states mutually guarantee access to three
transport vessels,
– the Multinational Corps Northeast in Stettin (Germany, Denmark, Poland) set up at
the end of 2000,
– the joint mine clearance association of the Baltic Naval Squadron with its joint headquarters
in Estonia,
– the joint naval headquarters of the Benelux states in Den Helder,
– the Dutch example in air transport: in stead of procuring their own transport aircraft
(with the resulting costs for in frastructure, maintenance, personnel etc.), the Nether-
319

lands have agreed with Germany, on a cost-sharing basis, to use German air transport
capacities,
– air traffi c control in the Baltic states: since the three Baltic republics lack the necessary
aircraft, nations of the NATO alliance have been operating an air policing mission
on a three-month rotation scheme with the necessary aircraft and ground personnel
sta tioned in Lithuania,
– mutually guaranteed and timely access to strategic air transport capabilities for the
transfer of NATO and EU rapid re action forces: 15 nations, including Germany, have
a joint contract with the supplier Ruslan SALIS Company which provides access to
up to six An tonov 124-100 heavy transport aircraft for multinational NATO or EU missions,
– the AWACS fl eet – although this is a NATO project, it is a good example of joint alliance
institutions,
– the multinational armed forces com mands EUROFOR (European Opera tional Rapid
Force) and EUROMAR FOR (European Maritime Force) with France, Spain, Italy and
Portugal as participants.
The examples show what is already possi ble and functioning today. Soldiers from
all of the European states are experiencing day-to-day multinational cooperation in their
headquarters and units.
Equipment planning and acquisition will also have to be carried out with a greater
level of coordination between the European members in the future. The increasingly expensive
development of new military tech nology has already stimulated strong moves
towards integration – almost all of the German armed forces’ major acquisition plans
are multinational projects. Despite this, there is still much room for greater effi ciency.
Agreed European norms and larger orders can contribute towards a lowering of costs, as
well as improving cooperation be tween Europe’s armed forces. The Euro pean Defence
Agency EDA represents a step in this direction. It is designed to pre vent what sometimes
presented a problem in past multinational projects: variations in equipment increased in
relation to the num ber of countries involved in the cooperation project.
Coordinated cooperation, beginning at the equipment planning level, is essential if
Europe wishes to close the gaps in its ca pabilities. The list of European defi cits is long.
With the European Capability Action Plan (ECAP) of 2001 the EU member states declared
themselves in favour of util ising synergy effects to close military capa bility gaps.
The Europeans will be unable to overcome their equipment defi cits at a national level
– not least because of the limited budgets in all of the states. Joint European efforts are
needed, and they offer the chance of further integration. We have had good experiences
with the existing multinational cooperation in Europe. In future we should combine not
only command structures and capabilities but also share or join together in fulfi lling
tasks more than in the past – every army does not have to be able to fulfi l everything. The
age of the national universal army is drawing to a close.
320
THE NEXT STEPS
A European army, embedded in a new European Union, cannot be a short-term objective.
A series of measures are con ceivable in order to get started and provide the integration
process with new impulses, namely:

– the setting-up of a European Air Transport Command which replaces the appropriate
national commands in all of their functions, i.e. including edu cation and training,
maintenance and logistics, as well as joint air transport squadrons (the coordination
of plan ning and operations of existing air transport capacities within the EAC framework
can be seen as an interme diary step).
– at the moment there is no independent council of ministers for military matters in the
EU: a “genuine” council of de fence ministers should be formed on the way to a joint
European army.
– a European Parliament defence com mittee should be formed. At the mo ment questions
surrounding defence policy are only dealt with by a sub committee of the European
Parlia ment’s Committee on Foreign Affairs. A defence committee which accompa nies
the ESDP and the process of in creased integration of the European armed forces as
an independent committee would signal the strength ening of parliamentary responsibility
at the European level.
– a European Military Academy or Uni versity should be created. This could also be a
step towards formulating common educational and training standards for future leading
personnel in the European armed forces.
– a Baltic Naval Headquarters devel oped from the Baltic states’ successful cooperation
in the joint mine clearance association.
– joint manoeuvres irrespective of bor ders are already part of the European armies’
everyday activities. In order to continue improving cooperation be tween the various
armed forces the number of joint European manoeuvres should be increased.
– based on the well-practiced experi ence of close European cooperation in civil aerospace
programmes, military space programmes should also be started together
(reconnaissance and communications satellites). Combined operations in this fi eld
would be of benefi t in view of the high costs in volved.
– European coordination of the available capabilities. The smaller EU states in particular
are unable to provide the whole capability spectrum. They could use their limited
resources to special ise in niche capabilities.
– existing resources and capabilities within the member states can be com bined with the
aim of setting up a communications base / communica tions network to support ESDP.
– the European Gendarmerie Force (EGF), which was called into being by France, Italy,
the Netherlands, Spain and Portugal (headquarters: Vicenza, operational since the beginning
of 2006), is a reaction to experiences during previous EU missions. It should
be expanded because, as a police force with military status, it can be the appropriate
answer in confl ict situa tions where the military is no longer required, but where conditions
are not yet stable enough for a standard police mission. In the case of Germany,
which cannot participate because of its strict division between the military and the
police, we should seek a solution that enables us to contribute to the EGF.
– now that Poland and the Baltic states have joined the Schengen Agreement, there is
an urgent need for joint activity in carrying out the necessary control of the external
maritime borders, since these states’ national resources will be insuffi cient for this
purpose. In an enlarged “Schengen for the Baltic Sea” the resources of the states bordering
on the Baltic Sea could be bundled, and the territorial waters and economic
zones in the Baltic Sea could be in creasingly monitored in joint opera tions.
– in the case of Air Policing, and against the background of the short fl ying times between
the European sover eign territories, it would be practical to develop a form of
321

322
close cooperation or a joint solution to the tasks. NATO’s air traffi c control in the
Baltic states can act as a model for other smaller states. Joint air traffi c control could
not only be more effective, it could also help to lower the costs.
OUR PROPOSED DIRECTION – AND WHAT HAS TO BE DISCUSSED BE
FOREHAND
Many questions still have to be answered on the road to joint armed forces. There are
still many structural differences within Europe, for instance in the formation of the military
forces, parliamentary participation or principles of leadership of the armies.
If we want to reach our desired goal, we should begin by discussing it and talking it
over with our partners in Europe. A Euro pean White Paper would be an appropriate form
to promote and structure this process of clarifi cation and understanding.
For the preparation of a European white paper on security and defence policy we
would like to discuss the following aspects with our European partners:
– the various national parliamentary de cision-making processes regarding deployments
make it necessary to seek a common denominator.
– the creation of a common military or der and/or a common military law is necessary.
– we have to develop a standardised model of leadership and education.
– it is necessary to determine the deci sion-making procedures for declara tions of war
and peace (jus belli et pacis). The powers and responsibilities of the Commission
(executive), the Parliament (legislature) and the Euro pean Council must be clarifi ed.
– the handing-over of sovereignty by the EU states and the transfer of powers to a democratically
legitimated Euro pean level must be discussed. Armed forces are a powerful
expression of state sovereignty. The EU is not a state. It is something entirely new,
and at the present time it is a kind of con federation of states with its own status in
international law. How will, and how must, the EU be constituted to enable it to have
joint armed forces? The na tional conditions for the handing-over of sovereignty must
also be regulated. For instance, in the case of Germany, are the regulations in the
Basic Law (Article 24) suffi cient to this purpose?
– questions of fi nance have to be clari fi ed. There has to be a fair distribution of costs
between the EU and the member states, and among the mem ber states.
– in analogy to the national defence min isters, a defence commissioner could head the
military structures at Euro pean level.
– the role of the nuclear armed forces of France and Great Britain in an inte grated European
army should be dis cussed.
OUR OBJECTIVE: EUROPEAN ARMED FORCES
Germany’s Council Presidency offers a good opportunity to take the initiative to wards
creating joint European armed forces. This is an ambitious objective and its realisation
still seems to lie in the distant future. There could well be parallel struc tures during a
transition period, but the ob jective is an integrated European army.
If we don’t start now, we will never reach our goal. Other, similarly ambitious European
projects, ranging from a common market to a common currency, did not hap pen

overnight either. They stood at the end of a long process which, in the case of the euro
for instance, lasted thirty years.
Greater integration of the national armed forces in multinational structures is, for
in stance in Germany’s case, not a new ex perience: during the Cold War era the level
of integration was greater than it is today – it was essential because of the brief early
warning intervals. Germany’s armed forces were an integral part of NATO from the very
beginning and they were completely aligned to the NATO structures.
The handing-over of sovereignty in a key area of state politics, such as that of na tional
defence, may well come up against many reservations, but there are prece dents: with the
introduction of a common currency the participating states gave up considerable decision-making
powers in the fi elds of economic and monetary policy – in the interest of
strengthening Europe.
We can learn from the introduction of the euro in another respect, too: not all countries
joined in the euro at the start – be it because the preconditions were not satis fi ed,
or because there were political reser vations. In a similar way, the joint army pro ject does
not have to be a “Europe of the 27” project from the very start.
It would be possible to pick up a suggestion from the Joint Declaration of Germany,
France, Luxemburg and Belgium of April 29th 2003 on the creation of a “European Security
and Defence Union” (ESDU). Ac cording to the declaration the task of the fu ture
ESDU should be “to bring together those member States that are ready to go faster and
further in strengthening their de fence cooperation. (…) ESDU would be open to all the
current and future member States that are ready to join. We wish this concrete cooperation
to be integrated into the constitutional Treaty of the European Union so that, in the
end, all current and fu ture member States could be a part of it.”
A European army would alter the network of relationships between the European
Union, the member states and NATO. For us Europeans NATO will remain the strategic
link between the EU and the United States of America. But like the United States, Europe
must also be in the position to act independently if necessary. The United States and the
EU under the umbrella of NATO – in the best case these are two highly effi cient partners.
The way in which this partnership can create stability and new security was demonstrated
in the Balkans. As Social Democrats in Europe we want to take the initiative of
embarking on the road to a European army. For decades Germany has lived in peace with
its neighbours, many are our fellow members in NATO and the EU. We are ready to enter
into a proc ess at the end of which we integrate our na tional armies into a supra-national
army, a European army.
The opinions presented in this paper do not necessarily refl ect those of the FES London.
323

Global Security and German Policies

PREVENTION AND SUPPRESSION OF ORGANISED
CRIME
Richard Mörbel & Sonke Schmidt
This article authored by Richard Mörbel was originally published by Friedrich-Ebert-
Stiftung, Department for Development Policy, Berlin, 2007
ABSTRACT
According to Europol, there are some 4000 organised crime groups active in the EU
with very differing organisational structures. Globalised and more intensive trade relations
plus technological progress have made a considerable contribution to the internationalisation
of their activities, which now transcend cultural, legal and economic limits.
Yet the actual size of the threat posed by organised crime is diffi cult to asses; the greater
part of criminal activities remains undetected.
Criminal groups visualise Europe as a single area of action, which means that Europe
needs a suppression approach which is correspondingly unifi ed and in which the national
policies of member states of the EU are integrated. This suppression approach should be
both repressive and preventive in its focus and should be based on an overall strategy
for internal security in the EU. A strategy of this kind should aim inter alia at a situation
where transnational investigations are routine and where European institutions such as
Europol and Eurojust are further strengthened. In the area of intergovernmental cooperation,
a quantum leap is required: all law enforcement actors should be brought together in
a broad European information and cooperation network. Priority must continue to be given
to the reciprocal recognition of sentences, rulings and procedures, if necessary on the basis
of further harmonisation measures for instance in the procedural area. Data protection
should not be ignored in this process, but it needs to be modernised: all technological options
should be fully exhausted to guarantee on the one hand adequate scope for weighing
up alternatives while at the same time making possible the identifi cation of misuse.
What must then follow is the effective mobilisation of the political, economic and
public sectors, which must be brought together in a broader opinion-forming process.
For this reason the political sector must, in its own vital interest, not only support the
combating of organised crime but give it active support. The funds made available by the
EU will increase tenfold between 2006 and 2013 to around 150 Mio. Euro and can make
an effective contribution to intensifying the efforts required.
Finally, cooperation between law enforcement bodies should not stop at borders. Where
criminal groups operate on a global basis, every effort should be made for countermeasures
to be globally effective. The EU, with its specifi c experience in intergovernmental cooperation
on security, can in the future and in its own interest adopt a pioneer role.
I. ORGANISED CRIME – “IN THE SHADOWS OF PUBLIC AWARENESS”
It is diffi cult to give an exact description of organised crime. It pervades our society like
a dense network of underground fungus. Links are only sporadically visible, organisational
structures usually remain hidden. In Germany and in Europe, organised crime groups ap-
327

pear in myriad forms. National and locally based groups with tight leadership structures
and an international action radius exist side by side with homogenous, ethnically defi ned
groups, whose leaders are located outside of Europe. Other groups, such as organised biker
gangs, defi ne themselves by distinctive organisational modalities or codes of conduct.
A special problem is posed by the loose, professional networks without any hierarchical
superstructure which come together as the need and circumstances dictate and whose
ephemeral nature calls for specifi c investigatory and intervention techniques. A problem
not to be underestimated because of its economic harm potential is organised crime inside
legal enterprises. In this form, criminal networks either succeed in establishing themselves
in such a way as to escape notice by enterprise monitoring or enterprises are founded
directly as covers to disguise organised criminal activities including money laundering.
Europol estimates that there are currently some 4000 OC groups active in the EU.
The Situations Reports published annually by the BKA in Germany make possible a
quantitative assessment of developments. 1 The situation described is similar to that of the
EU as a whole with the following crimes in the forefront: drug traffi cking (34.6%), property
crime (17.1%), white collar crime (13.7%), smuggling and traffi cking with human beings (approx.
15%) 2 . Low-risk counterfeiting of commodities and trading or smuggling with these
is still on the increase. The grossly oversimplifi ed conclusion can be reached that crime
groups are basically endeavouring to minimalise risks and maximise profi ts. Hence the
organisational forms their activities take are infl uenced by the actual or assumed effectiveness
of crime prosecution by national authorities or international cooperation.
In the more recent past, developments such as the opening of the European single
market, worldwide liberalisation of trade and progress in the areas of transport, information
and communications technologies and the market developments associated with
these have led to a pronounced internationalisation of organised crime. Criminal networks
weigh up the risks and possibilities offered in various countries and use one country,
for instance, as a strategic centre, carry out their activities in a second country, organise
money laundering in a third, make use of registered enterprises in a fourth and build
themselves a legal existence in a fi fth country. Successful investigations in one country
often lead to specifi c activities being transferred to another. The challenges of organised
crime are thus both local and global. Crime investigation bodies must have corresponding
action tools at their disposal if the fi ght against organised crime is to succeed.
Generalised descriptions can only serve to give a fi rst impression of the phenomenon.
It will also be diffi cult to arrive at a generally accepted defi nition of organised crime. 3
Ultimately this is a term which in practice serves as a functioning categorisation within
which phenomena can be described or more narrowly defi ned 4 . The question is also
raised in this context of how serious a criminal act should be in order to be categorised
as organised crime. The Federal Criminal Police Offi ce (BKA) introduced the term “OC
1 There are now also in some Länder such as North-Rhine Westphalia and Brandenburg joint
situation reports issued by the police and public prosecuting offi ce which by their very nature refl
ect the situation from more than a police perspective.
2 Separate Situation Reports are devoted to these two crimes, there is a joint Situation Report
of BKA and Federal Police on illegal immigrant smuggling.
3 In 1990 in Germany a defi nition was developed by a joint working group of judicial and police
authorities (GAG) which is the basis for evaluating a concrete case as “organised crime”.
4 Walter Gropp/Barbara Huber: Rechtliche Initiativen gegen organisierte Kriminalität, [Beiträge
und Materialien aus dem Max-Planck-Institut für ausländisches und internationales Strafrecht
Freiburg, Volume S 84] Freiburg 2001.
328

potential” as an objective instrument of measurement for this purpose and the term lays
down “general indicators for recognising OC relevant facts” on a scale going up to 100
points, with most groupings in Germany reaching the middle of the scale. 5
At the European level a basis is required in order to be able to compare trends, legally
justify the use of special investigation methods or cooperation associated with this. The
joint European defi nition of organised crime put forward by the Commission and the
framework legislation are limited to setting down rough benchmark data such as the
identifi cation of certain forms of crime in combination with the determination of upper
and lower limits for the corresponding national punishment assessments. 6
Since the year 2000 Europol has provided situation reports on organised crime in
Europe based on contributions from member states but with the reservation that the data
are only comparable to a certain extent 7 . In 2006 this annual report was upgraded to an
analysis of threat which is now based on an independent evaluation of data and fi ndings
supplied by EU member states. 8
It is diffi cult to estimate the amount of damage caused by organised crime. The dark
fi gure is high, meaning that fi gures available tell us little. The estimates of the United Nations
Offi ce on Drugs and Crime (UNODC) can be consulted as an indicator. These state
that approx. 2-3% of GDP are the result of organised crime activities. The International
Monetary Fund similarly estimates that some 2-5% of global GDP are “laundered”, i.e.
originate from illegal sources. If these estimates are projected onto the EU, the damage
according to Europol could amount to around 270 to 730 billion US Dollar. In the German
National Situation Report for 2005 in contrast the damage arising from organised crime
is shown as a mere 842 million €, only marginally different to the 1999 fi gure (1.4 billion
DM). Even if the UNODC estimate is to be regarded with caution, it nevertheless
becomes clear that we are dealing with a phenomenon that has only been marginally
grasped and one which cannot be adequately analysed and assessed on the basis of existing
fi ndings.
Their survey logic makes nationally generated data in the fi rst instance a record of
the work of the prosecuting authorities. The offi cial fi gures for organised crime are to a
large extent dependent on the intensity of investigations. On the one hand, organised
crime becomes known to a much larger extent than other crimes through the activities
of the law enforcement agencies, on the other hand it is the investigating resources that
determine the number of crimes solved. The majority of OC proceedings in Germany are
processed in a time-consuming way by police and customs authorities and specialised
public prosecutors set up specifi cally for this purpose. If funding remains constant, the
level of offi cial fi gures will also remain unchanged. Hence developments in the organised
crime sector which can be statistically measured are largely determined by the amount
of resources made available. The actual extent of organised crime and the direct and
indirect damage it causes are considerably higher than the statistics.
Against this backdrop, some generally statements can be made in the way of a rough
assessment of the problem of organised crime in Germany and the EU:
5 In 2005 the average was 42.3 points. Only approx. 13% of groups examined get over 60 points.
6 Council Proposal for a Framework Decision on the fi ght against Organised Crime COM
(2005) 6, fi nal as at 19.1.2005. Political agree-ment has since been reached on this proposal. Formal
adoption by the Council is expected early 2007.
7 http://www.europol.eu.int/publications/EUOrganisedCrimeSitRep2004.pdf.
8 http://Europol.eu.int/publications/OCTA/OCTA2006.pdf.
329

(i) Organised crime in Germany – and all over the world – occurs mainly in those areas
where the anticipated profi t is highest. A few years ago fi nancial centres like the
Rhine-Main area or the “Rhine track” in North-Rhine Westphalia were the preferred
arenas, recently a clear concentration on Berlin has developed in the regional distribution
of OC proceedings. 9
(ii) Organised crime in the EU is more common in conurbations than in rural areas. The
demand for illegal commodities is usually greater here, crime opportunities are more
favourable and the possibilities for acting in conspiracy greater.
(iii) It is generally relevant to distinguish between domestic and foreign or non-EU actors.
As a rule national groups head the list of organised criminals although, as in the
case of Germany, foreign groups as a whole perpetrate most of the crimes recorded,
i.e.approx. 60%.
(iv) Domestic and “successfully integrated” groups tend to have adapted better to lawful
social and economic structures, are able to alternate at ease between their worlds and
can mould their “habitat” to their requirements.
(v) Where established groups function smoothly and invisibly, newly formed groups
tend to be more obvious in the way they operate, sometimes including the use of violence.
This statement is equally true for established groups who are defending their
“market”.
(vi) Low fi gures in the statistics on organised crime or crimes of violence do not, however,
indicate an absence of organised crime. They can equally well be an indicator for
functioning networks and for the lack of impact of society’s defence mechanisms.
At this point a disconcerting conjecture is raised: we do not know suffi cient about
organised crime to enable us to estimate its effects on our society. It has to be assumed
that the dangers posed by organised crime are being underestimated.
330
II. THE POLICIES OF GERMANY AND THE EUROPEAN UNION – “GREATER
EFFORT NEEDED FOR A DECISIVE BREAK-THROUGH”
The basic elements of Germany’s security police are set out in the fi rst of the periodic
Security Reports dating from 2001. This also mentions organised crime, but as one crime
category among many.
II.1 German Institutions and Actors
As the Federal Republic is a nation with a federal constitution, there are many different
actors in Germany engaged in the fi ght against organised crime. In addition to the
police force in the federal states, prominent actors include the Federal Criminal Police
Offi ce (BKA), the Federal Police and the Customs. Standardised or agreed upon procedures
and methods used in combating crime are laid down in bodies in which the (criminal)
police forces at national and state level are represented.
Issues of fundamental relevance for the cooperation between the forces are regulated
by the “Working Group of Heads of the State Criminal Police Offi ce and the Federal
Criminal Police Offi ce” (AG Kripo) unless an issue needs to be clarifi ed by overarching
(political) authorities. Below the AG Kripo level there are bodies to deal with specialised
issues, as for instance the Commission on Organised Crime (KOK), where public pros-
9 cf. Federal Criminal Police Offi ce: National Situation Report on Organised Crime 2005, p. 12

ecutors regularly participate in meetings. The OC public prosecutors themselves also
conduct meetings at a national level, in which KOK representatives also participate.
The “Joint Working Group” of judicial and home affairs authorities from the federal
states conducts meetings in which the Federal Interior Ministry and the BKA also take
part and is responsible for policy issues involved in OC suppression which are relevant
both for the police and the judicial system.
This may seem to the impartial observer to be an array of cumbersome authorities,
but in reality it is an effi cient set of instruments. Years of experience, good relationships
between decision makers plus short communication channels result in the right
decisions being made. The system also ensures methods on a nation-wide basis without
these having to be set in place by a superordinated body. Compatibility of investigation
methods is guaranteed by means of (nationally) standardized regulations, specifi cations,
training projects, etc.
Organised crime is the subject of many and varied legislative initiatives. Over the past
four years alone, the Federal Justice Ministry has issued 152 press releases on the subject.
10 They dealt with, for example, the implementation of EU directives and agreements
on cross-border cooperation, amendments in substantive criminal law such as those on
traffi cking with human beings and the optimisation of formal criminal law, for instance
in skimming of profi ts.
In June 1997 the Conference of Interior Ministers adopted the IMK Action Programme
dealing with practical suppression measures. After reviewing the actual situation at the
time, the AG Kripo decided on its implementation in December 1998. An evaluation conducted
in 2002 revealed inter alia that not all measures were being carried out in the same
way everywhere, that in some areas differing organisational solutions had emerged and
that use of resources differed. The outcome was that deviations were tolerated if these
were objectively justifi able. Where deviations were not considered acceptable, improvements
were subsequently initiated via the bodies responsible.
Apart from this, the state of Baden-Württemberg conducted a survey in 2002 on the
progress made in the fi ght against organised crime. To this end a representative volume
of fi les on OC proceedings were consulted, examination was made of the measures
adopted, the time and effort spent on investigations and the results. The fi ndings that
emerged from this investigation are still infl uential today – and not only for the authorities
in Baden-Württemberg.
II.2 European Initiatives, Cooperation and Institutions
As stated in the government’s contribution to the review of the “Hague Programme”
of 15.09.2006, the German government has undertaken to improve cooperation in the
fi ght against crime. In this context it undertook to implement the measures planned
“effectively and comprehensively in the period foreseen” 11 . It also spoke out for “more
intensive EU support for national efforts [….] in the fi ght against organised crime”. On
the subject of police cooperation, it suggested that cooperation forms laid down by the
Prüm Treaty 12 should be incorporated in the EU legal framework.
10 c.f. http://www.bmj.bund.de/enid/0/0/Presse/Pressemitteilungen, Status 02.10.2006.
11 Council of the European Union, Doc. 14292/04 of 5 November 2004, Annex 1.
12 The Treaty of Prüm was signed initially by seven EU members on 27 May 2005. The Treaty
envisages an intensifi cation of transnational cooperation in the fi ght against terrorism, crime and
331

Investigation proceedings carried out in a team are described in more detail in the EU
decision on “Joint Investigation Teams” and even in the draft European Constitution. 13
Yet to date proceedings involving several member states are the exception. They are
often impaired by legal, organisational and psychological obstacles. Hence a process of
gradual implementation is recommended which could take the following form. Where
the main focus of criminal activities is ascertained in one member state, it is agreed that
the police and public prosecutor in this state mastermind investigations and are supported
in their work by colleagues from other member states involved. The offi cials in the
other states will then provide assistance, either by providing on the spot support, or by
collecting evidence “at home” and making this available to the authorities who are conducting
investigations. This admittedly does not exhaust all the possibilities offered by
European law, but at least three short-term objectives are reached: criminal proceedings
can be conducted at the same standard as hitherto and using customary routines while
at the same time training cooperation “on the case” and enabling the working methods
of national forces to be synchronised.
Members of criminal organisations operate beyond the borders of the EU, meaning
that bilateral and/or multilateral cooperation forms with partners outside the EU must be
sought. Germany has concluded agreements on cooperation in fi ghting organised crime
with a number of states at the bilateral level.
The “Russo-German Working Group” gives a practical example of how such agreements
can function in reality. The Federal Criminal Police Offi ce and the Interior Ministry
of the Russian Federation organise a bi-annual conference alternating between Russia
and Germany. This gives interested German and Russian police forces and public prosecutors
a platform on which to present cases which are of relevance to the other country
and which cannot be solved “through conventional channels” at all or not within an acceptable
timeframe. Those departments in the other country responsible for a particular
case are then invited to attend on the basis of case records made known in advance. In a
two to three day period the case is discussed by a small group of offi cials from relevant
departments and solution proposals are presented to the plenum.
Russia is also represented in the “Task Force on Organised Crime” for the Baltic
Sea region. This body has evolved into an important forum for cooperation in the Baltic
region, not least because it brings together EU members, EEA states and Russia in an
international cooperation structure. The main emphasis of work is on the exchange of
crime-related information and concerted operations by police, customs and border police
agencies in the participating states.
Other supranational bodies on combating organised crime in which the Federal Republic
of Germany is represented are notably the Financial Action Task force (FATF) as
the key international cooperation body on money laundering, the UN Commission on
Crime Prevention and Criminal Justice which is responsible inter alia for the “Global
Plan of Action against Organised Crime” and the Lyon Group. This latter was initiated
by the G8 heads of state and government in the form of a high-level group of experts after
these experts had identifi ed organised crime as a global peril during their summit in
Halifax in 1995. This group is mandated to study and evaluate international agreements
and mechanisms and submit proposals for remedies of any shortcomings.
illegal migration, particularly with regard to the optimisation of reciprocal data access. Four further
EU states have subsequently announced their accession to this Treaty.
13 c.f. details in Chapter 3.4, No. 5
332

On the basis of the Amsterdam Treaty 14 , European political planning mechanisms are
underpinned by strategy and action plans in the area of “freedom, security and justice”.
The Plan of Action absorbs the specifi c measures 15 proposed by the European Commission
and has come to be regarded as the sole point of reference for the planning and
implementation of European policies on suppressing organised crime.
One of the key items on the programme was the creation of standardized or more
compatible legal framework conditions within the EU. For this purpose a framework
decision on the combating of organised crime was adopted in January 2005 (see footnote
4). Since then there has been a uniform European legal framework, albeit in a loose form.
It complements the UN agreement against transnational organised crime, the “Palermo
Convention” that came into force in 2003 and to which the European Community acceded
in May 2004 16 .
Over the past few years the institutional framework has altered considerably with the
creation of a number of new European authorities such as Europol, Eurojust and Cepol. 17
Some time will elapse before these institutions work effectively and in concert with others.
And as long as the fi nality of European police and judicial cooperation remains controversial,
interaction between the European and the national levels will continue to be tense.
Europol enjoys a special position in the fi ght against organised crime at the European
level. As it has no investigatory authority of its own, it is restricted to collecting information
relevant to investigations. But as long as the fl ow of data from member states
remains limited, it cannot make suffi cient use of its potential. One logical step forward
would be to turn Europol into a European Crime Offi ce. In the light of the political dimension
of a project of this nature, this seems to be a remote prospect, notwithstanding
the fact that Europol as an institution is no longer questioned.
Eurojust has been in existence since 2002 and aims at improving cooperation between
the member states’ prosecution offi ces at cross-border investigations against felony and
organised crime. Similar to Europol, Eurojusts role and function are provided with a
question mark. The Constitutional Treaty put on hold, included the possibility to further
develop Eurojust into a European prosecution offi ce.
CEPOL was founded 2005 with the aim of giving national higher ranking police offi
cers European training since European aspects are gaining importance in the everyday
work of national forces.
In addition there are now numerous other institutions active in the security policy
area 18 , although all of them are caught in the confl ict area between national sovereignty
and European integration or transferral of power.
14 The Treaty of Amsterdam was adopted by EU heads of state and government on 16 and 17
June 1997 and signed on 2 October 1997. It came into force on 1 May 1999.
15 Communication from the Commission “Development of a strategic concept on tackling organised
crime”, COM (2005) 232, fi nal as from 2.6.2005.
16 The UN Convention against Organised Crime, also known as the Palermo Convention, came
into force on 29 September 2003 after being ratifi ed by 40 countries. The related Protocol on traffi
cking in human beings came into force on 25 December 2003, and the protocol on smuggling of
migrants on 28 January 2004. The protocol on fi rearms did not come into force.
17 There is a comprehensive overview of this in: Urich Sieber/Franz H. Brüner/Bernd von
Heintschel-Heinegg/Helmut Satzger, Handbuch zum Europäischen Strafrecht, Max Planck Institute
for Foreign and International Criminal Law, Freiburg, appears Spring 2007.
18 A new European agency which is rapidly gaining in importance is, for example, Frontex,
located in Warsaw, Poland and responsible for the management of the EU’s external borders. An-
333

334
II.3 European Policy Priorities
On the basis of the aforementioned Council decisions and Actions Plans, the following
priorities for a European policy on combating organised crime emerge:
(i) In 2006 the Europol Situation Report was upgraded to an analysis of the threat in
Europe. It is based on an independent evaluation of data and fi ndings provided by
member states (see footnote 6), and makes possible an objective estimate of threats,
weak points, trends and areas where interests overlap.
(ii) A European policy planning and implementation mechanism is being planned with
which agreement on common priorities can be reached based on threat assessment,
with these priorities then being implemented at the operational level and their effectiveness
subsequently evaluated. This cyclical process is intended to be the locomotive
for a European crime suppression policy.
(iii) An important area in the development of European policy concerns information
management between investigating authorities on the one hand and access to data
not collected by police forces. There is a proposal at the European level for all European
police forces with equivalent competences to have access to all those data to
which the national police also has access. 19
(iv) There are still some legal obstacles in the immediate fi ght by investigation authorities
against criminal groups, particularly in relation to the effectiveness of investigation
tools targeting organised crime specifi cally, for instance the use of joint investigation
teams 20 , undercover investigators or surveillance of commodity deliveries. There is
also a long way to go before the joint investigation processes as foreseen in Part. lll-
257 of the draft European Constitution are in place. 21
(v) Financial investigations play a special role in the fi ght against organised crime. The
tracing of fi nancial transactions “upwards” could become an effective instrument
in the fi ght against organised crime as long as transparency and KYC in the fi nance
sector is increased suffi ciently and European cooperation intensifi ed, including the
formation of international investigation teams.
(vi) The same applies to crime-susceptible business sectors: transparency of market
processes and the documentation of transactions increases the traceability of criminal
activities. Short-term gain considerations generally argue against overloading the
markets with “bureaucratic” procedures. But a long-term cost-benefi t analysis could
well lead to the conclusion that improved procedures will force illegal actors out.
(vii) In the area of criminal law cooperation there are two main policy threads. On the one
hand, there is a need in some sectors (i.e. traffi cking in drugs and human beings) to
harmonise European court rulings so that loopholes can be fi lled. On the other hand,
other relevant agency, ENISA, located in Heraklion, Greece, deals with network and information
security. Two important European networks for information exchange are the European Judicial
Network and the European Crime Prevention Network.
19 See the Commission Communication to the Council and the European Parliament on measures
to be taken to combat terrorism and other forms of serious crime, in particular to improve
exchanges of information, COM (2004) 221 fi nal as from 29 March 2004.
20 Framework decision by the Council on Joint Investigation Teams, Offi cial Journal of the
European Communities L 162/1 of 20.6.2002 (2002/465/JI).
21 A detailed analysis of the current incompatibility of OC investigations is given in: Gary
Linton/Bridget Munro/Martin Youngs: Closing the Gap in Policing Organised Crime – A European
Perspective, Falcone Project 2002.

cooperation between law enforcement agencies needs to be optimised. Given that
harmonisation of criminal law can only be achieved politically to a limited extent, the
principle of mutual recognition of judgments and decisions opens up possibilities
for increased effi ciency in cooperation.
The European arrest warrant scheme was the fi rst step in this direction, many more
followed and will continue to follow. 22
(viii)International cooperation will have an important role to play in the light of the
diversifi cation of organised crime. Cooperation with third countries is ponderous and
protracted and the relevant agreements at the UN level are of a more declamatory nature.
Sometimes poorly developed administrative cultures and communications hazards make
reliable cooperation at the operational level diffi cult to come by.
Its experience in the policy area “freedom, security, justice” has led the EU Commission
to the conclusion that the present long-drawn out decision-making processes in the
so-called Third Pillar of the EU are no longer adequate in the light of the scale of terrorism
and organised crime. Hence the Commission supports the introduction of a common
decision-making procedure based on a qualifi ed majority.
III. SCENARIOS – BETWEEN EUROPEAN INTEGRATION AND SAFEGUARDING
SOVEREIGNTY
III.1 Further developments in OC
Development trends for organised crime in Germany and Europe can be described
as follows:
1. First it can be assumed that criminal actors will continue to be active in the traditional
crime areas (drugs, property, economic crime, offences revolving around night
life, traffi cking and money laundering. They will continue to make use of the criminal
networks and the corresponding infrastructure and attempt to reduce the risk of
prosecution by becoming more professional.
2. In addition to this, new illegal market segments will be opened up, sometimes with
the aid of innovative criminal practices. The internet offers numerous possibilities of
acquiring fraudulent material gain. The physical location of the perpetrators is of no
relevance. Any place in the world can become a crime scene. It can be stated today
that various criminal groups are turning away from traditional crime settings and – in
the spirit of profi t maximisation - are on the lookout for “business sectors” offering
even more profi t and with less hazard involved.
3. Restraints posed by language, communication, transport and trade will continue to
decrease, mobility and fl exibility will continue to grow. As in legal business life, modern
information and communications technologies will be used increasingly for faster
information transfers, as planning instruments and as logistic aids. This means that
alliances between internationally operating criminal groups on the one hand and local
actors on the other will continue to grow. The distinction between national and
non-national groups will lose its relevance.
4. On the international market today actors of very different origins and with a variety
of fi nancial and organisational structures are competing with one another. Informa-
22 Commission Communication to the Council and the European Parliament: Mutual Recognition
of Final Decisions in Criminal Matters; (COM/2000/0495 end).
335

tion on competitors, trends, gaps in legislation, funding and tax systems and the
mobilising of state support benefi ts will gain in importance. Complex international
corporate strategies will lead to an increasing danger of criminal structures developing
inside corporations or to methods or even structures of organised crime being
used to illegally infl uence market processes.
5. In the process of growing globalisation criminal groups will change location more
quickly – but not automatically their fi eld of operation – in pace with more effective
working on the part of police and judiciary, both in the national and international
context. This means that international cooperation beyond the borders of Europe will
continue to become more important.
6. Globally networking markets mean that in future we must expect our political and
economic system to become more crisis-prone. As long as the confl ict potential in the
world between societies and nations remains high, there is a continuing danger of local
confl icts exploding and terrorist attacks being used as a means to achieve political
or social objectives. In this context too an alliance between terrorism and organised
crime can be anticipated. The destabilising effect of international organised crime on
weak third countries which is irrelevant in Europe today should nevertheless not be
ignored, if only in the interests of security. 23
336
III.2 Further Developments in the fi ght against OC
In the light of the developments in organised crime described, effective suppression
will depend on the extent to which European and international structures can be developed
to face up to this internationalisation in its varying guises. Simultaneously it will be
decisive that local and national prevention, investigation and law enforcement systems
are effectively organised and horizontally networked and interact smoothly at the international
level.
III.2.1 Germany
If one restricts oneself to basing suppression concepts solely on the available offi -
cial fi gures, one can only react to crimes which have become known. But in the area of
organised crime, as in the business sector, it is important to look forward and adjust
to emerging “markets”. One tool for doing this is the building of scenarios bringing in
external expertise. If experts on social change, technical developments etc, develop scenarios
together with the police on the types of crime to be expected, it becomes possible
to keep up with offenders and take immediate, promising countermeasures when a new
phenomenon occurs. First attempts in this direction give cause for optimism.
Experiences with the Nazi dictatorship in Germany have led to a strict separation of
police and intelligence services, which is not the case in many other countries. This is
not the place to go into details of pros and cons. The fact is that in the area of combating
terrorism, an attempt is now being made to bring together information held by varying
authorities. Similar developments are required in the fi ght against organised crime. It
23 It is no coincidence that the European Security Strategy “A Secure Europe in a better World”,
adopted on 8 December 2003 (15895/3; PESC 787), identifi es the problems of organised crime and
weak state structures as two of fi ve central challenges for European security, see: http://ue.int/
uedocs/cmsUpload/o31208ESSIIDE.pdf.

is diffi cult – from the economic viewpoint at the least -to live with the knowledge that
police in one place are researching urgently for fi ndings which have long been available
to authorities elsewhere.
It is self-evident that data protection needs to be given special consideration in this
context.
Organised crime groups are in no way thwarted by national borders between countries
and it goes without saying that the borders between the states within Germany pose
no problems for them. In spite of this, most OC proceedings are policed by the force in
one federal state, although many cases would lend themselves to processing by a team of
investigators from several states. Joint analysis and investigation units from Federal Police
and Federal Criminal Police Offi ce are also conceivable. Unfortunately this is seldom
the case. There is cooperation between the Federal Police and the Federal Criminal Police
Offi ce in the fi eld of traffi cking offences, but this is often laborious. The Federal Criminal
Police Offi ce and the customs even work together under one roof in combating money
laundering, but there is also much room for improvement.
The secondment of offi cials from one authority to another also occurs too rarely, especially
where state borders will have to be crossed or different national or state authorities
are involved. This is regrettable, since feedback on this – at least on the part of the
offi cials – is generally positive.
Experience with operations carried out at a supra-state level is also generally positive
and occurs fairly often in the fi eld of organised crime, as in search operations, securing
evidence, etc. In these cases the operation is usually planned by one authority and then
often carried out in several federal states simultaneously.
Foreign police offi cers visiting German police agencies on an observer basis and vice
versa are seen as very positive experiences. For years now scholarship holders not only
from developing countries have been spending time with German police authorities and
later become contact points particularly in the organised crime area when cooperative
measures are called for.
In addition to this, joint projects between two or more EU member states have often
proven useful in promoting lasting cooperation. For example there is long-standing
contact between German and Italian law-enforcement agencies aimed at the concerted
combating of Mafi a-like groups, French, Spanish and German authorities conducted a
joint project on combating Russian OC groups and a project involving the Netherlands,
Belgium, Great Britain and Germany was targeted at combating Bulgarian traffi cking in
human beings. Projects like these have an important side effect in addition to the specifi c
stated objective and that is on the case learning – not only theoretically – how the fi ght
against criminal networks is organised in other European countries, what restrictions
the partner service has to deal with or where it can operate better and more successfully.
Ideas gained in this way can often be used in an offi cial’s own working area.
III.2.2 EU
The European capacity for action needs to be improved to keep pace with the transnational
character of organised crime. A legal basis covering this aspect is planned as part
of the draft Constitution treaty.
The Amsterdam Treaty already foresees transition to the principle of majority decisions.
This could lead to more effi cient and far-reaching decisions, i.e. including transferral
of competences in the analysis and investigation of more complex cases and formula-
337

tion and implementation of European policies towards third countries. But a step of this
kind must have the support of all 25 member states and is correspondingly contentious.
A rise in organised crime can ultimately be anticipated if European integration and
political networks are not strengthened in the areas of justice and home affairs. Improved
cooperation and the resultant success of investigations could, however, also lead to evasive
reactions. Offenders could be motivated to further internationalisation or diversifi cation
of their activities, especially where third countries with weak legal structures offer
withdraw options. This scenario will mean that more will be expected from an improved
international legal system.
Whether and how European policies on the prevention and combating of crime are
continued and expanded is a central variable for assessing further developments:
(1) At the moment decision-making processes are laborious, the transfer of national competences
is not taking place or only very gradually, the creation of intergovernmental
networks has preference over the building of integrated structures. Against this background
the scope for integrated policies in Europe would appear at the moment to be
limited.
(2) Closely linked to this is the democratic legitimisation of deeper European cooperation.
Steps towards integration in the area of home affairs and justice have far-reaching
implications, particularly in relation to parliamentary control, civil liberties and
the future balancing of internal and external security, and this raises the question of
appropriate consultation and information involving national parliaments, stakeholders
and citizens.
(3) Also linked to this catalogue of issues is the question of the equipping and supply of
resources for international cooperation at the European, national and local level.
(4) A further key criterion for assessing policy development in this area is the connection
between external and internal security and how this is articulated in any future
broad-ranging European policy.
In all likelihood the pressure for more effective policies at the European level will continue
over the next few years. This will probably not, however, lead to a swift “quantum
leap” in the combating of crime since there will still be strong national opposition to a
transferral of key national competences. This means that networked policy development
and implementation will gain in importance, making it possible on the one hand to pursue
common interests in an integrated way and on the other hand keeping open local and
national scope for action.
The Hague Programme of Action 24 currently refl ects minimum European consensus.
But every single item is highly controversial in the light of a protracted decision-making
process based on unanimity. Any progress made is gradual and generally unsatisfactory.
The gap between political acclamation and the actual will to cooperate is too wide.
More progress is conceivable, in particular in the wake of a boost in the combating
of terrorism. In this respect there could even be realistic hope, in the event of the European
draft constitution failing to get off the ground, of European crime fi ghting policies
becoming better integrated and better networked, either on the basis of a “fall-back constitutional
solution” consisting of deepened cooperation between those members states
willing to integrate or the currently favoured communitisation of the “Third Pillar” on the
basis of Article 42 TEU.
338
24 c.f. Chapter 2

III.3. Crime prevention
The outlook for effective policies to prevent (organised) crime is relatively inauspicious.
At the European level there are at present some mild attempts to promote effective
prevention standards in the relevant economic and administrative sectors. There is no
indication of how the primacy the EU attaches to competitiveness can be reconciled with
requirements which could reduce profi ts. Misuse in the area of public procurement and
corruption is not pursued with the intensity necessary to bring about a real reduction in
criminal incentives. A determined and locally based policy of drying out organised criminal
structures, for which the Netherlands provides a remarkable example, tends to be the
exception in the EU. In Germany efforts in this direction have to date been somewhat
half-hearted. But the issue was taken up during the German EU Presidency in 2007.
III.4 Between communitisation and the preservation of national sovereignty
The relative neglect of prevention and combating of organised crime at the national
and European levels gives little cause for optimism for the chances of future policy
perspectives. In principle, the European Union provides the right framework for policy
formulation and evaluation, given the highly-developed state of institutionalisation of
crime. Any national initiatives taken unilaterally cannot succeed in the light of the generally
accepted need for networking in the areas of exchange of information, threat evaluation,
investigation cooperation and policy formulation.
Should attempts to make decisions taken at the European level become more effective
by introducing qualifi ed majorities, based either on a future European constitution
or on an alternative “fall-back” treaty, the kind of progress in the fi ght against organised
crime will become conceivable which is unthinkable under present circumstances.
This scenario is opposed, however, by the fi rm will of EU member states to retain
their national sovereignty. Although the acceptance of a need for swift and fundamental
political reforms in the European internal security sector is currently being relayed via
the threat of terrorism, organised crime is seen more as a marginal phenomenon. Lack
of knowledge on the scope, risks and dangers of organised crime currently lead to the
assumption that the chances for a mobilisation of political will on this topic are slight. A
fundamental strategic and public opinion forming debate could bring about a change.
IV. OPTIONS FOR ACTION – THE MOVEMENT TOWARDS “STRATEGY-DRIVEN
POLICY MAKING”
IV.1 The importance attached to OC combating in our society
There is a fundamental question to be raised on the importance attached by society
to the fi ght against organised crime. Contrary to popular belief, violent confl icts are not
the rule; organised crime can be violent but primarily has a commercial focus. Unrest is
bad for business. As long as criminal organisations function smoothly and little is known
about their ways of functioning, fi ghting them remains a social problem diffi cult to deal
with. But today’s mobility means that gaps in policy tend to lead more to geographic
shifts than to any sustained reduction in crime.
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340
IV.2 Strategy for internal security
An effective fi ght against organised crime calls for agreement on the means to be
employed which should also include all the different sectors in society.
The fi ght against organised crime must be an integral part of the public safety issue
with the complex array of themes and fi elds of action involved, and thus an effective
strategy can ultimately only gain legitimation if anchored in a broad, socio-political debate.
This strategy should be developed at a European level, defi ne the framework for
national consultations and policy development and form the basis for enhanced security
cooperation with third countries.
A strategy of this kind should embrace issues of institutional competences, organisation
of the exchange of data and information which also safeguard civil liberties, but also
quite specifi c questions involving cooperation between the judiciary, police and security
forces. It could supply the necessary framework for mobilising the resources required for
planned reforms without neglecting the rights of citizens in Europe to information and
democratic participation.
IV.3 The need for reform in Germany
a) Introduction of intelligence-led risk and threat assessments
An effective approach to organised crime requires that its magnitude can be reliably
assessed. Data contained in offi cial fi gures are not a reliable measure of the real scope of
the phenomenon. One important task is therefore further development of research on
the dark fi gures which is not currently able, with the means and methods at its disposal,
to supply the necessary data on organised crime.
At the same time, the crime fi elds processed by law-enforcement agencies should be
assessed in relation to the damage they can infl ict on society. In this process, the fi ght
against organised crime should have a ranking in line with its threat to society. The results
of this ranking should be refl ected in the allocation of resources.
b) Intensifi cation of cooperation between authorities at the national and state level
Since basic responsibility for internal security is accorded by the Basic Law to the
states in the federation, it follows that the fi ght against organised crime in Germany in
decentralised.OC investigations are dealt with according to standards that are modifi ed
according to the peculiarities of the case. The offi cers entrusted with OC proceedings
are usually specialists with extensive experience in criminal investigations and who have
received special training. In spite of this, individual investigation complexes differ as to
the resources used, the course of investigations and the success of investigations. This
has to do with the specifi cs of the case but could also be linked to the fact that in one
case means and methods are more effi ciently interlocked than in others. As general rule,
methods such as benchmarking and best practice should be available, terms that are not
very widespread in the German police force – not in this sector at least. Comparison
between means and practices – including across state borders – and measuring actions
against the best practiced are signs of professionalism and should be in standard use.
German attitudes are often perceived as a many-voiced choir beyond our borders too.
What is required is agreement on joint German policies on the fi ght against organised
crime that is binding on all the actors involved, at least as far as it is represented to the outside
world. This demand is not utopian, as has been demonstrated by the example of the
fi ght against terrorism, where a uniform policy is emerging from the pressure of events.

Of course internal policy differences should not interfere with the ability to act on
a European level. German experience with managing different perspectives can also be
very useful for Europe. If the division of roles within Germany and the situation in Europe
are compared, there are several parallels. In both cases partners are at work with
differing experience and interests. In both cases central bodies are not allowed to enforce
a uniform policy against the resistance of individual players. Yet in both cases a common
position must be formulated and represented vis à vis third parties.
c) Creation of specialised criminal court divisions
The processing of substantial OC cases by the judiciary remains unsatisfactory. The
relevant basis for assessing organised crime cases in Germany is Section 129 of the Penal
Code (StGB) (formation of criminal organisations). A look at criminal law in practice reveals
that this section is regularly referred to when justifying criminal proceedings, but a
sentencing according to Section 129 StGB is seldom passed. One reason for this is that high
court decisions apply very stringent criteria for the proof of certain constituent elements of
a crime. Quite apart from this the penalty incurred of fi ve years imprisonment at the most
seems unduly low – measured against the degree of unlawfulness of the crimes.
If the activities of criminal organisations result in a trial, offences are often singled
out to be dealt with. And here it is often the case that the main focus is on offences which
are particularly signifi cant and where the objective and subjective facts of the case can be
easily proven. Offences which appear to be less important or those where the marshalling
of evidence is laborious and diffi cult then fall by the wayside. This way of doing things
based on lean proceedings does not lend itself to the peculiarities of organised crime. At
a trial the details and connections produced by investigation are either not taken into
consideration or – as one expert observed – “pushed back into the dark fi gures area”.
In view of the above, it would be desirable to follow the example of white collar crime
and establish specialised criminal divisions to deal exclusively with serious and organised
crime. Should this come about, the emphasis given in future to lean proceedings
would have less weight and the uncovering of criminal structures more.
d) Development of a broad-based crime prevention policy
In the area of prevention, individual fi elds of organised crime are addressed, like for
instance drugs. At the same time insuffi cient progress has been made in sensibilising the
population to organised crime as such and the threat emanating from it. Hardly anyone
in the general public has any idea of the extent to which society and hence the individual
citizen is threatened by criminal organisations. Prevention of crime by the police and the
German Forum for Crime Prevention DFK (in addition to the many other initiatives and
institutions involved in prevention) do not achieve the desired effect. For the DFK to integrate
prevention initiatives at national, state and local levels is without doubt the right
approach. But is the average citizen aware of this? Does he or she learn what they can do
to minimise the likelihood of offences being committed?
Cooperation between law enforcement agencies and industry has a preventive aspect
Joint initiatives in the prevention of organised crime range from the general exchange of
information to specifi c cooperation between the police and the security offi cers in companies
to close cooperation between motor vehicle manufacturers and prosecuting authorities
in developing security devices in cars and in the tracing of (upmarket) vehicles.
A tricky question is still whether and to what extent personal data can be exchanged.
It is clear that this cannot be a “one-way street” with industry being the sole supplier of
data. But it is also well known that the transmission of personal data by authorities is
341

subject to restrictions for reasons of offi cial secrecy and privacy. These problems can only
be solved by legislation.
IV.4 Need for action at the EU level
a) Policy planning and implementation
At the European level there are numerous action plans on organised crime or related
issues. These are largely – but not entirely – subsumed under the fi ve-year “The Hague
Programme”. The programme remains in need of improvement and development, but it
can nevertheless provide initial values and reference points for German political initiatives,
as is already the case at the EU level. Above all, the Hague Programme is not a
political framework for the development of a coherent European policy on home affairs.
Clear strategic targets are required if on the one hand planning reliability and orientation
for national actors is to be guaranteed and on the other hand incompatible policy
developments between the member states avoided. A strategy of this kind should be
developed jointly between the member states and the competent EU authorities.
The effectiveness of any future policies on justice and home affairs is also closely
linked at the macro level with the future development of the European draft constitution.
The European reform debate should be intensifi ed since a reform backlog could result in
high costs in terms of security policy.
b) Information management
Below this level, the question arises in particular as to European data management,
access by investigators to data collected for purposes other than police use, unlimited but
controlled comparison of data between the services of the various member states, etc. To
bring this area forward, the member states need common standards to characterise or
implement policies, a more intensive operational cooperation and the implementation of
confi dence building measures.
The gradual building of an “internal security architecture” is based primarily on improved
data management as a basis for concrete cooperation. Cooperation in fi ghting organised
crime comes fi rst here. If this policy is to succeed, cooperation between national
actors is once again of decisive importance.
An effective combating of organised crime by member states is in the interest of all
legitimate actors. A uniform evaluation mechanism would be useful, similar to the OECD
Pisa process in the education sector. The evaluation system currently in use is slow, is not
implemented evenly and is also not binding.
c) Qualitative re-orientation of cooperation in criminal law
In the area of judicial cooperation, it would be correct to speak of a reform crisis. Constitutional
reservations, in Germany in particular, seem to be guided less by the need for
improved cooperation than by formal legal argumentation contexts motivated among other
things by the upholding of national legal traditions and related clientele interests. If you
on the one hand reject mutual standards and on the other hand question the reciprocal
recognition of national legal standards, you begin to go round in circles. This paralysis must
be ended. Progress can be made in the mutual recognition of court judgments, orders and
evidence if agreement is reached on minimum standards which are objectively verifi able.
This should also explicitly include the harmonisation of subordinate legislation.
The fi nancial drying out of criminal networks is one of the most effective measures in
the fi ght against organised crime. The successes registered in Ireland, Great Britain and
the Netherlands in seizure and confi scation of capital obtained by intransparent or crimi-
342

nal methods could lead to similarly problem-oriented solutions in other EU countries.
The combination of fi rm civil and criminal law instruments in a standardized approach
can make possible considerable progress in the fi ght against organised crime.
d) Further intensifi cation of police cooperation
There is still the need for reform in intergovernmental cooperation on investigations.
What is particularly important here is the effective link-up of national information networks
for the purposes of police investigations. Also important are the investigation tools
specially adapted to cooperation at the EU level, such as the Joint Investigations Teams
(JITs). The network of national liaison offi cers should also be mentioned, which facilitates
intergovernmental cooperation but at the same time weakens the position of Europol.
This infl uenced Denmark’s decision to withdraw all liaison offi cers from EU member
states and focus contacts on Europol.
e) Formulation and implementation of European crime prevention policies
In principle crime prevention should be an integral part of a broad European security
policy; at present it is only rudimentarily developed. Four areas here deserve special
attention: In the area of corporate and white-collar crime, improved transparency standards
can on the one hand narrow the scope for criminal action and on the other hand
facilitate the investigation of this crime category.
In the area of primary prevention 25 there is a lot of lost ground to be made up for.
There are only a few member states like the Netherlands that have developed and implemented
a prevention policy aimed at the mobilisation of all relevant actors in society in
order to minimise the opportunities for crime.
In Europe there is ample supply of promising projects, often at the local level and tailored
to specifi c needs. It is the task of the European Crime Protection Network (EUCPN)
to utilise this wealth of experience for the benefi t of a broad public and those responsible
for policy formulation.
As in the organisation of the private sector and non-governmental actors, transparency
and the clear allocation of responsibility are also required in the public sector to
reduce the opportunities open to organised crime. In general, insuffi cient importance is
attached in the EU and the member states to the combating of corruption.
f) Further strengthening of international cooperation
Safe havens in third countries with corrupt administrative and judicial structures
are becoming increasingly interesting to criminal groups. International cooperation on
security policy must increase in importance in pace with actors outside the EU choosing
the EU as a fi eld of operation and with criminal networks using third countries as safe
havens. Hence a further step in the direction of interlocking internal and external security
at the European and international level is required.
In a phase where Europol and Eurojust, with the great challenges they face in their areas
of mandate, are still in an early phase of their development, they are at the same time
called upon to become foreign policy actors in order to create the framework for concrete
progress in search actions. A broad scale strategy and geographically focussed policy
implementation is called for here and to date we have only seen the beginnings of this.
EU member states’ policies at the national level will continue, they are indispensable,
but making them known and coordinating them at the European policy level does not
function well. National self-interests stand in the way of decisive security policy coopera-
25 Primary prevention refers to policy measures aimed at preventing the emergence of criminal
risks.
343

tion with third countries. The current patchwork of national and integrated policies is
not in itself a contradiction, but it must be better synchronized and coordinated to form
an effective pressure group.
The EU’s regional nature is its strong foreign policy advantage. Itself a unique regional
project, the EU today is a foreign policy actor that develops effective supranational
policy instruments and that makes effective use of this knowledge in cooperation with
third countries. In any future regionalisation of international security cooperation, this
could possibly be the EU’s decisive contribution.
Even today the European Commission plays an important role in the development of
cooperation standards in security cooperation with the G8 nations. It is in the EU’s own
vital interest to continue to develop its competence and take over a creative role including
in the UN context. This is one reason why the EU should put more effort into the development
of multilateral standards in security policy cooperation.
The world needs a strong European actor who gives multilateral and interregional
security cooperation precedence over bilateral policy dialogue.
The authors: Richard Mörbel, former Commander, 1983 – 2004 with the Federal Criminal Police
Offi ce (BKA) member of the BKA headquarters staff, lecturer at the Federal University of Applied
Administrative Sciences and Group Head “Organised Crime”. Sönke Schmidt, European Commission
offi cial since 1993, from 2001-2005 Head of Sections “Organised Crime” and “Economic,
Financial and Computer Crime”; currently consultant in the Directorate-General for “Freedom,
Security and Justice”. This contribution refl ects the authors’ personal opinions.
344

ON A NEW MISSION
THE FOREIGN MISSIONS OF THE BUNDESWEHR AND
GERMAN SECURITY POLICY
Stefanie Flechtner
This article authored by Stefanie Flechtner was originally published by Friedrich-
Ebert-Stiftung, Department for Development policy, Berlin, 2007
The Compass 2020 project represents the Friedrich-Ebert-Stiftung’s contribution to a
debate on Germany’s aims, role and strategies in international relations. Compass 2020
will organise events and issue publications in the course of 2007, the year in which German
foreign policy will be very much in the limelight due to the country’s presidency of the EU
Council and the G 8. Some 30 articles written for this project will provide an overview of
the topics and regions that are most important for German foreign relations. All the articles
will be structured in the same way. Firstly, they will provide information about the most
signifi cant developments, the toughest challenges and the key players in the respective political
fi elds and regions. The second section will analyse the role played hitherto by German
/ European foreign policy, the strategies it pursues and the way in which it is perceived. In
the next section, plausible alternative scenarios will be mapped out illustrating the potential
development of a political fi eld or region over the next 15 years. The closing section will
formulate possible points of departure for German and European policy.
ABSTRACT
Something unthinkable until the beginning of the 1990s has become part of “normal”
German foreign policy: in crises and confl icts soldiers of the Bundeswehr are being deployed
outside the NATO area, in the Balkan region, in Afghanistan, the Middle East and
in Africa. Not only the missions and structures of the Bundeswehr have changed because
of these foreign deployments, but the “expeditionary force” also represents one of the most
profound changes of the Federal Republic’s principles for foreign and security policy.
At the same time these foreign missions are only one part of Germany’s reorientation
in security policy. With the end of the East-West confl ict the concept of security in
Europe has changed, now reaching beyond the traditional military perspective. With the
concept of a comprehensive multilateral and preventive security policy including a wide
spectrum of civil capabilities together with the military, Germany is trying to live up to
new and changing challenges.
Germany’s security environment is still subject to change. It is characterized by historically
unique stability and security within Europe on the one hand and by growing
global interdependence creating new factors of risk and threat on the other.
Against this backdrop, this article puts forward three scenarios for German security
policy and the Bundeswehr’s future: in scenario 1, Germany is not able to realize the ambition
of a comprehensive security policy; the Bundeswehr is running the risk of wearing
itself out in missions. In scenario 2, thanks to the consistent and effi cient realization of the
345

concept of a comprehensive security policy, Germany is experiencing its fi rst successes
in the consistent stabilization of crises and confl icts; the Bundeswehr is on its way to
becoming a postmodern army. In scenario 3, due to the uninhibited proliferation of nuclear
weapons, Europe is facing a new threat; German security policy is radically reviewed and
once again the Bundeswehr is becoming an army of defence.
The different development paths indicate that German security policy will in future
be faced with multi-faceted challenges. The path of a comprehensive security policy must
be pursued consistently. For this purpose its tools for security policy must be developed
further while at the same time fostering security policy integration, mainly within the
scope of the EU. At the same time politics must not lose sight of those “risk factors”
which might principally question Germany’s security policy course. This includes simmering
threats like the proliferation of weapons of mass destruction and also the potential
erosion of the domestic foundations of German security policy.
346
I. THE INTERNATIONAL FRAMEWORK
I.1 11/9 and 9/11 – about the change in the security landscape
Two dates, 11/9 and 9/11, connected by reversing the fi gures, have become the symbol
for the profound changes in world politics at the threshold of the 21 st century. They also
represent a signifi cant change in Europe’s security landscape and our concept of security.
The fall of the Berlin wall on November 9, 1989, marks the end of the Cold War and
the division of the world into two ideologically rigid blocks facing each other in hostility.
Germany and Europe had a historic chance to overcome the division into East and West
that existed since World War II. This vision has become part of our reality since German
reunifi cation and the eastern enlargement of the EU in 2004.
However, Yugoslavia’s disintegration shortly afterward showed Europe that the threat
of war and confl ict in Europe had not been eliminated with the end of the East-West confl
ict and that major challenges, even security-related ones, had to be resolved on the path
towards a “continent united in peace”. With the advent of the catchword “globalization”
Europe also realized that the dynamic process of opening borders reaches far beyond the
end of the obstructive confrontation and the political geography of our continent, and
that this process is equivocal regarding its impact on Europe. On the one hand hardly
any other region has benefi ted as much as Europe from the abolition of political and economic
borders, as well as from the technological and communications links around the
world. On the other hand this has created new vulnerabilities, dangers and threats.
With the end of the Cold War Europe’s security environment has become more complex.
On the one hand this is due to the fact that in the “global village” it becomes more
and more diffi cult to separate internal and external aspects of security. This is linked to
the awareness that our security is not only dependent on repelling military threats by
traditional defence, but to an increasing extent also on coping with a large number of
non-military problems and hazards such as global climate change, the tides of refugees
and the competition for resources. On the other hand the spectrum of actors relevant to
Germany’s and Europe’s security has also become more multifaceted. Since the dissolution
of the bipolar order new actors have been emerging onto the world stage. The unique
power position of the USA, especially from a military point of view, is still undisputed
but at the same time there is an increasing number of states which, supported by their

enormous economic speed of development, quite rightly claim the status of Global Players.
Non-state actors have also gained more infl uence on security-related world affairs,
primarily due to the progressive denationalization and privatization of violence.
The latter was dramatically made clear to the world on September 11, 2001. With
the assaults on the World Trade Center and the Pentagon a small group of terrorists not
only destroyed two major symbols of the economic and military power of the United
States, but also the American feeling of invulnerability. The assaults triggered a basic
reorientation of US foreign and security policy by the Bush administration. Since then
the American government has mainly been emphasizing the military power of the United
States following its interests, fi rst and foremost unilaterally outside the international institutions.
At present it is hard to estimate the long-term effects of this reorientation. It is
clear that 9/11, the American declaration of the “War on Terror” and the subsequent wars
in Afghanistan and Iraq have changed and shaken international relations. They have
polarized the international community, NATO and Europe itself, and they have even
touched upon and changed international thinking about security and security policy.
I.2 Enhanced security, human security, preemptive defence – about the change in
security-related thinking
The issue of security is dominating the current international debate like no other. Even
in Germany and Europe thought and action in foreign policy are mainly geared to security.
But what is the meaning of notions like “security” and “security policy” at the beginning of
the 21 st century? Uncertainty and lack of clarity still prevail regarding this issue. Especially
in Europe, the essence of states’ security policy is much less clearly defi ned than during the
time of the East-West confl ict. This is mainly due to the enhanced concept of security and
security policy as described above. In Europe the debate about security policy was clearly
characterized by military categories until the end of the 1980s, while in today’s thinking
about security policy social, economic and ecological issues play central roles alongside
military aspects. The enhanced notion of security has now made its way to the German and
European security debates. However, politics still fi nds it hard to translate it into practice.
In addition, the notion of enhanced security is itself ambiguous, and in the current debate
it is interpreted in two very different conceptual directions: on the one hand towards a comprehensive
policy of peace-keeping, on the other towards an expanded defence policy.
Approaches of common collective security have gained importance since the end of the
Cold War. This fact is based on the argument that in an increasingly globalized world one’s
own national and regional security can only be promoted and guaranteed by strengthening
international security and multilateral order. In other words, in the interdependent
world of the 21 st century Europe and Germany will not be safe as long as other sections
of the world’s population are living in great insecurity. This approach is most clearly
based on the concept of “human security”. This concept puts the individual and his/her
protection from political violence, war and arbitrary treatment into the focus of security
policy. In doing so the goal of physical security (“freedom from fear”) is closely linked to
the goals of human development (“freedom from want”) and the guarantee of universal
human rights. Hence “human security” does not only include a collective concept but
also a holistic concept of security policy 1 . Originally the Human Security Concept was
1 The approach of „Human Security“, its conceptual development and political implementation
are described in Debiel, Tobias/Werthes, Sascha (publisher), Human Security on Foreign
347

discussed and developed within the scope of the United Nations, and recently it has also
received increasing attention within the framework of the EU 2 .
The increasing presence of collective security concepts, however, has only been one
side of the coin in the discourse about security policy since 1989. In the current debates
security policy is also often perceived in terms of selective national security and based on the
idea of national self-defence. A state (or an alliance) must be able to ward off independently
external dangers and threats even in an emergency. By comparison, collective interests like
international security and order are of minor importance. This type of thinking in state security
policy is not new, but in the wake of the events of 9/11, it has gained importance once
again, not only in the United States but also in Europe. In addition, the notion of defence itself
has gained a new meaning in the context of the new threats, especially the threat from
international terrorism, distancing itself from the concept of traditional territorial defence.
This new enhanced idea of defence is most radically represented by the United States of
America. In the concept of pre-emptive self-defence 3 defi ned by the US administration in
2002, the clear goal of US defence policy is to stifl e an opponent’s capability to attack, right
from the beginning. Therefore the new defence concept reaches beyond national borders,
even including preventive military strikes in cases of emergency. The US administration
thus advocates a new proactive concept of self-defence which, however, is highly disputed
in terms of politics and international law 4 . Europe and Germany have not yet followed this
radical enhancement of the notion of defence. Specifi c aspects of this agenda, however,
also play a role in Germany, especially in defence beyond our own borders.
The German and European interpretations of the enhanced notion of security are
still ambiguous. The debate described above on security policy is oscillating around the
thinking patterns and concepts without clear positions. A central issue, not only in theoretical
terms but also practical terms, is whether security policy in the 21 st century should
be primarily oriented towards the idea of a common or national security policy, towards
strengthening a collective peace order or one’s own defence.
348
I.3 UNO, NATO, and the EU – about the change of institutions for security policy
The development of international institutions also refl ects the comprehensive and
often contradictory changes in security policy since the end of the East-West confl ict. In
recent years a clear trend has been observed towards reinforcing regional security co-operation
5 . This is exemplifi ed by the establishment of the European Security and Defence
Policy (ESDP) within the EU. At the same time traditional institutions of security policy
like the United Nations Organization (UNO) and the North Atlantic Treaty Organization
(NATO) have been put under enormous pressure to reform and adapt the scope of security
policy, and their ambitions and relevance have been questioned repeatedly.
Policy Agendas. Changes, Concepts and Cases. INEF Report 80, Duisburg 2006.
2 The „Barcelona Report“ of the Study Group on Europe’s Security Capabilities (A Human
Security Doctrine for Europe. The Barcelona Report 2004).
3 See „The National Security Strategy of the United States of America“, September 2002.
4 The main criticism is that the concept of preemptive defence blurres the separation line
between defence legitimated by international law and wars of aggression prohibited by international
law.
5 See development in Africa (African Union, ECOWAS, SADC) but also in Asia (ASEAN,
APEC) and in Latin America(OAS).

After 1989 many people thought the hour of the United Nations had come in security
policy. It seemed that with the end of the Cold War, the UN Security Council would be
able to free itself from the shackles of obstructive bipolar confrontation and be able to
act and take decisions in security issues. In fact the United Nations currently does play a
more active role in issues of international security. In particular the number of UN peace
missions has increased greatly 6 . And yet, the UN has been increasingly criticized regarding
its role in international security. The criticism is mainly directed at the UN’s operative
capability to act. As early as in the 1990s, due to the dramatic “failures” in Somalia,
Rwanda and the Balkan region, confi dence in the UN’s competence diminished greatly.
Despite the reforms achieved in the following years and the introduction of “robust”
mandates 7 there are still doubts regarding the UN’s capability to act in view of the lack of
human and fi nancial resources of many peace-keeping missions.
Additionally, the UN’s general claim regarding security policy, especially the authority
of the Security Council, is being increasingly questioned. All attempts made so far to
reform the Security Council to put it on a broader basis of legitimacy have failed. In addition,
the UN Security Council is running the risk of being marginalized and ignored in
central issues of international security. This is demonstrated by the wars waged without
a UN mandate in Kosovo and Iraq. Finally, the demands for reform of the UN Charter
have become louder since, in the eyes of many critics, it no longer meets the needs of
today. However, despite the criticism and the existing need for reform, the UN still is the
only security policy institution with a universal character. For this very reason in the 21 st
century the UN seems to be more irreplaceable than before.
NATO too has been undergoing profound change since 1989. After the end of the
East-West confl ict many observers thought it would break up. With the disintegration
of the Warsaw Pact and the end of the bipolar confrontation, it seemed that NATO had
fulfi lled its mission but lost its raison d’être. And yet NATO still is one of the central institutions
of European and transatlantic security. This was only possible, however, with
a profound strategic reorientation which can be summarized under the notions of “out
of area” and “out of defence”. After starting off as a defence community restricted to
the transatlantic area, NATO has become a globally active security agency. Nowadays
its tasks focus on international crises and confl ict management, fi ghting international
terrorism, and dialogue and co-operation with third countries on security-related issues.
Despite the transformation of the Alliance, which seems successful at fi rst glance,
the tensions and the number of unsolved issues seem to increase rather than decrease
even within NATO itself. This is exemplifi ed by the open dissent between its members on
the issue of Iraq and even more so by the gap between their expectations and demands
regarding NATO’s future. While the Europeans would like to see NATO once again as the
political forum of transatlantic partnership – or to use Gerhard Schröder’s words – as the
“place where the transatlantic partners consult and co-ordinate their strategic concepts”
– Washington hopes for a better distribution of the military burdens by NATO, asking
the Europeans to improve their capabilities for military co-operation. It remains to be
seen if these different perspectives can be united in a strong common vision of transatlantic
security in future.
6 In the 1990s alone the UNO executed 35 peace missions compared to less than 20 between
1946 and 1989.
7 A „robust“ mandate (according to chapter VII of the UN Charta) enables blue helmet soldiers
of the UN to defend not only themselves with weapons but also the mission and civilian persons.
349

The European Security and Defence Policy (ESDP) may be the most meaningful response
to the changes in the security policy landscape in Europe. The EU heads of state
and government committed themselves in Cologne in 1999 to “providing the European
Union with the necessary funds and capabilities to live up to its responsibilities within
the scope of a common European security and defence policy”. The ESDP was born. It
is not only an important step on the way to a “political Europe”, but it also expresses the
will of the Europeans to make their independent contribution to regional and international
security. On top of this the EU, like no other institution, is characterized by the
new enhanced concept of security policy. In ESDP, military and civil instruments have
been considered as equal components of security policy from the beginning. The EU’s
strategic ambition reaches even further: according to the European Security Strategy of
2003 the clear goal of the Union is to include all security-related policies of the EU and
its members in a common agenda for security policy, especially its diplomatic, economic
and development tools.
The EU is still far from reaching this goal, however. Yet within the confi ned scope of
the ESDP the EU has already made remarkable progress. The development of civil and
military capabilities of the ESDP in particular has progressed rapidly in recent years. The
ESDP has been in operation since 2003. Since then it has undertaken 15 missions to the
Balkan states, Africa, the Middle East and Asia. New missions to Kosovo and Afghanistan
are under way. Germany is a major player in EU security missions and the further
development of ESDP. Thus the EU has become a central reference point for German
security policy in only a few years. On the international level too, the EU has increasingly
been perceived as an important actor in security policy. Nevertheless many observers still
have doubts regarding the “force of conviction” of the European security policy. Criticism
is frequently voiced that the EU has a weak military position and therefore would only
accept seemingly “easy” missions, e.g. operations of minor military intensity. Or to put it
in transatlantic terms: “the US does the cooking, the EU does the dishes.” There are also
doubts about the political foundation of European security policy because until today the
EU member states have disagreed on security policy issues and been unable to fi nd a consensus.
Without this consensus, however, the EU is unable to act. Europe’s division over
the Iraq war and the subsequent helplessness of the EU have sadly exemplifi ed this fact.
In the foreseeable future the United Nations, NATO and the EU will provide the
institutional framework for the commitment of the Federal Republic of Germany in issues
of security policy. Its position and weight will depend on the development of the
framework conditions for security policy and also on the future strategic orientation of
German security policy.
350
II. THE FOREIGN MISSIONS OF THE BUNDESWEHR – A PARADIGM SHIFT IN
GERMAN SECURITY POLICY?
Since World War II German foreign and security policy has been characterized by
continuity. The decision to deploy German soldiers in international military missions
represents a certain break in this continuity. The Bundeswehr’s foreign missions are a
central part of Germany’s response to the changing international security environment
after 1989. However, they are also part of a new conceptual design of German security
policy at the beginning of the 21 st century.

II.1 The Bundeswehr becoming an expeditionary force
For the fi rst time, on May 16, 1993, the German government deployed armed soldiers
to a mission outside NATO territory. The deployment in Somalia within the scope of the
UN mission UNOSOM II was disputed. The opposition in the Federal Parliament, consisting
of the SPD (the German socialist party) and Bündnis 90/Die Grünen (the German
green party), were against it. Since the beginning of the 90s there have been heated and
controversial debates in politics and amongst the public about the participation of German
soldiers in international missions. The ruling of the Federal Constitutional Court in
1994 did not change much although it clarifi ed the legal situation in so far as Germany’s
participation in international missions was declared admissible provided that it was approved
by the parliament.
The peak of the political debate on foreign missions and the actual turning point in
the German security policy was reached with the Kosovo confl ict. In view of the worsening
humanitarian situation in Kosovo the Socialist/Green coalition government decided
in 1999 to take part in the NATO airborne attacks against Yugoslavia. Thus soldiers of
the Bundeswehr were waging war for the fi rst time. The missions took place without a
mandate from the UN Security Council, its justifi cations under international law were
disputed. Maybe it is an irony of history that the decision considered by many a break
of taboo, an abandonment of the German guiding principle “no more war”, was taken
by the very political powers that in the past had held a sceptical view of the military, and
that had strictly opposed out-of-area missions until the middle of the 90s.
However, the decision also provides proof of the protracted and controversial process
of rethinking in German security policy and the revaluation of the military linked
to it. By today, the deployment of German soldiers in security missions has become a
permanent part of the Federal Republic’s international commitment, accepted by a broad
majority of the political spectrum. More than 200,000 soldiers of the Bundeswehr have
been sent abroad since 1993. Thus the Bundeswehr is today one of the major contributors
to international peace missions. Germany’s military deployments have been marked by
a strong commitment to multilateral structures and action. Multilateralism is not only a
constant, but also a condition for the Bundeswehr going “out of area”. However, beyond
this, the new mission of the Bundeswehr is not yet clearly defi ned. This is especially true
of the geographical focus of the missions and the Bundeswehr’s range of tasks, which
nowadays range from national defence, to actual combat and stabilizing missions, right
through to non-military services like re-establishing infrastructures destroyed by wars.
Quite clearly, however, international interventions have become the primary task of the
military and decisive for its structure 8 . This is also indicated by a recently introduced new
army structure based on intervention, stabilization and supporting forces.
Within few years the Bundeswehr has evolved from a purely defence-oriented army
into an interventionist, active and multi-purpose instrument of German security policy.
Without any doubt this development may be considered a paradigm shift in German
foreign policy. It would be wrong, however, to see the paradigm shift in terms of the
military alone. Those advocating such a position are overlooking another central aspect
8 The White Paper explains: „International confl ict prevention and confl ict resolution including
the fi ght against terrorism will be the Bundeswehr’s more probable tasks in the foreseeable
future. They are decisive for its structure and they shape its capabilities, leadership structures,
availability and equipment.” (page 64)
351

of the change: nowadays the military is only one instrument of a much larger spectrum
of security policies in Germany. And this development also has an impact on the tasks
and philosophy of the military.
352
II.2 The concept of a comprehensive security policy
Germany’s current concept of security policy is most clearly described by the notion
of a “comprehensive security policy” 9 . The debate about the enhancement of the notions
of “security” and “security policy” had already begun by the end of the 80s, but the
real breakthrough of this approach in Germany only occurred under the Socialist/Green
Federal Government. Its stronger emphasis on mechanisms of civil confl ict resolution,
and also the practical experience gained in Balkan missions, played a major role in this
reorientation.
In recent years the concept of a comprehensive security policy in Germany has been
fostered on various levels by numerous initiatives. The “White Paper on Germany’s Security
Policy and the Future of the Bundeswehr” adopted by the Grand Coalition in 2006
also underlines the importance of this approach. However, no clear defi nition of the concept
is to be found either in this document or in any other offi cial description of German
security policy. But analysing the new approaches in German security policy the concept
can be summarized under the following four guiding principles:
A comprehensive set of instruments: German security policy is based on a broad range
of instruments and policies. According to the White Paper it is “neither solely nor preferentially
based on military means”, but also on instruments of diplomacy, economy
and development policy and the police. Thus, together with the Ministry of Defence,
many civilian institutions are involved in German security policy, such as the Federal
Ministry for Economic Cooperation and Development with its “supra sectoral concept
for crisis prevention, confl ict resolution and peace promotion in German development
co-operation”. Even outside the ministries in charge, Germany is fostering the development
of civilian capabilities for its security policy. One example of this kind is the Centre
for Civilian Peace Missions (Zentrum für Internationale Friedenseinsätze, ZIF), which
provides training for skilled and senior staff in civilian and monitoring missions. Linked
to the guiding notion of a comprehensive security policy, new tasks have been created
for the military, especially services with a civilian character like the reestablishment of
infrastructures in mission countries destroyed by wars.
An integrated security policy: the notion of an integrated security policy describes the
ambition to have a coherent and co-ordinated approach by all security-related actors.
With the Federal Government’s general concept of “Civil Crisis Prevention, Confl ict Resolution
and Peace Consolidation” (2000) and the action plan “Civil Crisis Prevention”
(2004), this approach was anchored and promoted in Germany’s security policy. In order
to provide a network for the German actors in the mission areas specifi c measures were
developed, such as the German model of “Provincial Reconstruction Teams” (PRTs) in
Afghanistan which, unlike the British or American PRTs, is not a military programme
but a cross-ministerial one.
9 In offi cial descriptions of German security policy the notion „extended security policy“
(www.bmvg.de, glossary „Security Policy“) is frequently used and less often the notion „far reaching
concept of defence“ (defence policy guidelines 2003).

Strong multilateral integration and effective multilateralism: the multilateral integration
of national security policy has a longstanding tradition in Germany. However, the international
missions of the Bundeswehr have given this dictum a new quality. It does not
only comprise the goal of “closely co-ordinated multinational action” (as in the White
Paper) but mainly the process of establishing common security related capabilities and
structures (see Chapter 1.3) driven within the scope of the EU. Within the framework
of the European Security Strategy, Germany also devoted itself to the goal of “effective
multilateralism”, a security policy based on multilateral institutions and multinational
co-operation focussing on strengthening such structures.
A policy of prevention: Germany’s comprehensive security policy is fi nally resting on
the ambition to be “preventive”. According to the White Paper “more and a more broadly
based prevention … shall reduce the risk of crises and thus the specifi c military response
to crises” and “shape the German contribution to peace, security and development …
more effi ciently and sustainably”. The Federal Government defi nes prevention “as policies
before, during and after a confl ict”. In Germany the fi rst catalogue of measures for
the implementation of a preventive security policy has been introduced in the form of the
above-mentioned general plan and the plan of action for crisis prevention.
II.3 Defi cits and opportunities in Germany’s new security concept
Meanwhile, the concept of comprehensive security policy has been fi rmly established
on the international level, too. Within the EU it has even become the determining factor
of security policy. All in all this approach is still quite young though, on the international
level Germany can hardly fi nd any role models for further experience and orientation.
Shaping a comprehensive security policy in terms of the four above-mentioned guiding
principles is a highly ambitious and complex political challenge. It requires a change of
structures, instruments and especially of thinking patterns in the entire foreign policy
and security apparatus (and beyond).
Germany has just embarked on this course. There are still many unanswered questions,
also regarding the above-mentioned equivocal nature of the enhanced notion of
security. Thus, it is unclear whether Germany’s new comprehensive security policy primarily
follows the concept of collective security or national defence. Between Gerhard
Schröder explicitly confessing “a co-operative peace policy” on the one hand 10 and Peter
Struck’s argument of defending German security “in the Hindu Kush” on the other 11 ,
there is a lot of room for interpretation regarding the purpose and goal of Germany’s new
military engagement.
Another question is the extent to which German politics is in a position and willing
to realize the concept of a comprehensive security policy. The degree of success in the
implementation of the four guiding principles varies. Germany’s set of security instruments
and capabilities has been clearly enlarged since the 90s. Important progress has
also been made on the international integration of the national security policies, especially
within the context of the EU.
10 Quote from Gerhard Schröder’s speech during the UN General Assembly 2003 and on the
occasion of the 50th anniversary of the foundation of the Bundeswehr in 2005.
11 Germany’s security is also defended in the Hindu Kush.” Quote of the former Minister of
Defence Peter Struck about the Afghanistan mission in 2002.
353

With regard to networking various instruments and actors, however, success stories
are rather few in number. Regarding co-operation and co-ordination it seems that the
political ambitions still end at the boundaries of the ministries in charge. This is illustrated
best by the White Paper conjuring up “interconnected security … in the awareness
of a comprehensive national and global security concept” at the beginning, but when
it comes to comments regarding its implementation it restricts itself to discussion of
the military aspects as such. Even the ambition to shape Germany’s security policy in a
preventive fashion has remained a mere declaration up to now, since Germany lacks not
only strategies for action but also the political culture for a real policy of prevention. In
German security policy, most decisions are taken in an “ad hoc” fashion, driven more by
the agenda of current crises and confl icts than by a long-term strategy of prevention.
Despite these critical statements the new concept for German security policy presents
an enormous opportunity. With the concept of a comprehensive security policy Germany
has phrased a response oriented towards the more complex and diffuse challenges of security
policy in the 21 st century, and is oriented in its ambition to apply a comprehensive,
interconnected, multilateral and preventive security policy. The Bundeswehr still plays
a crucial yet novel role. Accordingly the military is embedded in a broad framework of
civil strategies of security policy, precisely intended to enable this civil framework of
action -because with military means alone, neither can international peace be promoted
nowadays nor can national security be guaranteed. This is found increasingly on the
international level, too. It is reconfi rmed by practical experience like the positive developments
in the Western Balkans, a confl ict region where the international community and
Germany have committed themselves in a “comprehensive” fashion.
354
II.4 How consistent and sustainable is the new German security policy?
The “success story” of the Balkans also indicates, however, that a comprehensive security
policy is linked to long-term commitments and incurs high costs. So how sustainable
is Germany’s new security policy at the home front At fi rst glance domestic support
seems very high and stable. There is a broad consensus in politics about the concept
of a comprehensive security policy. Germany’s international security commitments are
supported in principle by all political parties and parliamentary groups with the exception
of “Die Linke”. Thanks to the constitutive parliamentary approval, all international
Bundeswehr deployments possess a high degree of democratic legitimacy.
On second glance, however, there are also signs of growing scepticism and unease in
Germany regarding the Federal Republic’s current course in security policy. This is exemplifi
ed by a discussion initiated by conservative politicians under the slogan “Hindelang
instead of Hindu Kush”, referring to a refocus of the Bundeswehr on national defence.
The claim for a more active role of the Bundeswehr in homeland security, repeatedly
demanded by leading CDU politicians within the context of fi ghting terrorism, aims in a
similar direction. Even on the left wing of politics, critical voices are increasingly heard
in view of the more active German commitment in security policy, especially by military
means.
The stance of the public is also equivocal. Surveys show that the majority of the Germans
support the way in which the Federal Republic is assuming its international responsibility.
According to an Emnid poll in 2006, 81% of the interviewees were in favour
of international deployments by the Bundeswehr “with a peace-keeping character”, and

“the participation in international combat missions to create peace under UN mandate”
was supported by 56% 12 . However, when asked about concrete missions, public consent
sank considerably. For example, the Bundeswehr’s mission in the Congo was only supported
by 47% of the interviewees, and deployment in the Lebanon by only 32%. Polls
also illustrate that the “theoretical” support for international security engagement dwindles
rapidly when, in practice, the population is confronted with the costs incurred by
the missions, both fi nancially and especially in terms of lives lost 13 . This may explain why
in 2006, 52% of the interviewees appealed for a “more reserved German role in international
politics”.
All in all the attitude of the Germans regarding security policy and the Bundeswehr’s
role can best be described by the notion of “friendly disinterest” proclaimed by Federal
President Horst Köhler. The general complaint of politics regarding this “disinterest”,
however, also highlights a paradox in the German debate: on the one hand politicians are
complaining about a lack of public interest, on the other people with political responsibility
are avoiding politicization of security issues, among other things because this might
jeopardize the foreign policy and security consensus made so important in Germany.
Germany’s new security engagement, and especially its military engagement, is still
an explosive topic right across the political spectrum. The paradigm shift in policy, initiated
by the Federal Republic with the Bundeswehr’s foreign missions and the concept
of a comprehensive security policy, has neither been concluded nor fully implemented.
The domestic foundation of the new German security policy could soon become fragile,
especially if the costs of such a political course keep increasing, if no success stories are
written or serious political alternatives arise in the debate. In each and every case the
question of when, where and how Germany should engage itself by using military means
will remain one of the central debates about foreign policy in German society.
III. SCENARIOS
The thesis spread at the beginning of the 1990s that the military would lose its importance
because of the end of the East-West confl ict has not been borne out, as shown
above. The Bundeswehr is no longer a static instrument of defence but an active and versatile
means of shaping German foreign and security policy. At the same time, however,
the military is no longer the sole or primary instrument of security policy, but is embedded
in a comprehensive concept.
Against this backdrop, three scenarios have been developed for the German security
policy and the role of the Bundeswehr in the year 2020. These scenarios described in the
following are based on two main development factors:
– the stability and/or change in Europe’s current security environment and the associated
threat perception in Germany;
12 All poll results quoted in the following are based on Emnid polls in 2004 and 2006. The results
were retrieved from the website of the Federal Ministry of Defence (www.bmvg.de) with the
exception of the poll on the Lebanon mission (in: “Germans against the Lebanon mission”, Focus,
online edition Sept.13, 2006)
13 See Wagner, Wolfgang: The democratic legitimacy of European Security and Defence Policy.
European Institute for Security Studies. Occasional Papers 57, April 2005.
355

– the effi ciency of the concept of comprehensive security within the scope of Germany’s
international commitment.
Furthermore the scenarios include the following aspects:
– Germany’s integration into international institutions of security,
– the security-related thinking (in terms of collective security or national defence) in
Germany,
– mission and tasks of the Bundeswehr,
– resources of the Bundeswehr,
– support for security-related and military engagement in politics and amongst the public.
356
III.1 “Worn out in mission” – the Bundeswehr in a crisis of legitimacy
Security in Europe is stable. Beyond the stable European area, however, there are still
numerous unsolved foci of crises and confl icts. The negative repercussions of these confl
icts are increasingly felt in Europe. The infl ux of refugees from Africa has reached new
dimensions. Instability in the Middle East leads to bottlenecks in the oil supply, pushing
up energy prices. The “war on terror” is being continued, but without visible success.
The Bundeswehr is still fulfi lling missions in various crisis and confl ict regions. The
reality of these foreign missions indicates, however, that the Bundeswehr does not live
up to its strategic ambition to be the instrument of a “comprehensive” and “preventive”
security policy as defi ned at the beginning of this century. The actions of the military
and civilian actors of security policy are inconsistent and insuffi ciently co-ordinated, and
hardly any progress has been achieved on the multilateral integration of the Bundeswehr.
Due to strategic differences between the governments of the member states, and growing
Euro-scepticism in the population, the security-related integration of the EU has come to
a halt. Even NATO lacks political impulses for success as an international crisis manager,
and the USA pays little attention to it.
The Bundeswehr is running the risk of being worn out in its current missions. Many
of the foreign missions have already lasted for ten or fi fteen years without sustainable
pacifi cation or stabilization of the crisis and confl ict regions. After initial success due
to the military engagement of the international community, the security situation has
worsened again in some regions such as in Lebanon. The Afghanistan mission failed
some years ago. Germany and its NATO partners decided to withdraw from Afghanistan
after a massive increase of attacks on coalition troops, reduction of the number of allied
troops and the deaths of many NATO soldiers, including Germans. Since then there has
been a civil war in Afghanistan.
Frequently the Bundeswehr feels abandoned by politicians concerning its missions.
In view of the precarious security situation in many regions there are no opportunities
for more civilian engagement and action. Many civil actors are withdrawing, especially
in the area of governmental and non-governmental development policy. The military remains
behind in the crisis region as the sole actor still capable of acting. However, in
view of the unstable security situation, the troops on the ground are mainly concerned
with their own security. In the Bundeswehr the purpose and goal of such missions are
openly doubted.
Even in Germany itself, such foreign missions are increasingly questioned by the public
and politicians. Many people cannot see a contribution to international peace or to Germany’s
security in the Bundeswehr’s international engagement. The criticism voiced also

highlights the high costs incurred by the missions. Leading conservative politicians are
demanding a radical change of direction in the Bundeswehr, moving away from the “global
peace mission” towards the protection of “immediate national security interests”. Besides
guaranteeing collective defence in the EU and NATO, the Bundeswehr should focus on
tasks of immediate national interest, like protecting national infrastructures against terrorist
attacks, or securing the external EU borders against illegal migration and organized
crime. At the other end of the political spectrum a “new peace movement” is forming, demanding
the abolition of the “counterproductive and expensive” Bundeswehr.
In the year 2020, the Bundeswehr fi nds itself in a deep legitimacy crisis. In view of the
lack of success German security policy has lost a lot of its political and strategic credibility.
The military commitment of the Bundeswehr seems to end in a bottleneck. And even
regarding security-related alternatives there is no consensus in the current discussions.
The Bundeswehr is dogged by failure due to the antagonism between ambition and reality
in its security policy.
III.2 “Winning peace” – on the way to a postmodern army
Security in Europe is stable. However, beyond the stable European area there are still
many unresolved foci of crises and confl icts whose impact is also felt in Europe. Germany’s
comprehensive commitment to global security and international peace, however, is
showing positive effects.
Together with its partners Germany has already generated some success stories regarding
the sustainable pacifi cation and stabilization of crisis and confl ict regions. The
Western Balkans have been successfully integrated into the EU; last year, the presence
of international troops has been considerably reduced once again in Afghanistan due
to the ongoing political and economic consolidation of the country. The situation in the
Middle East has at least stabilized since the increase of civil and military presence of the
international community in the region.
In Germany these success stories are considered proof of the fact that the concept
of a comprehensive security policy has stood the test. Remarkable progress has been
achieved regarding the implementation of this concept, especially the effective co-operation
between civil and military capabilities. The relevant security actors and institutions
are closely interlinked on the national level, consistently complementing each other in
mission areas. This is also increasingly true at the international level regarding co-operation
with security related partners in the UN, NATO and the EU. The EU is considered
the pioneer of the comprehensive security model. A high degree of military and civil integration
has been achieved by now also due to German initiatives like the pan-European
declaration of the parliaments “for a European army” initiated by the SPD. Some troops
of the Bundeswehr have already been incorporated in the new integrated EU armed forces.
Now the EU represents the most important point of reference for German security
policy, even in military terms.
The Bundeswehr’s foreign operations are focussed on a limited number of long-term
comprehensive civil/military missions. The role of the military is clearly defi ned within
the scope of such deployments: its task is the (re)establishment and maintenance of
public security and order. It thus creates a central precondition in the crises and confl ict
regions for the local political peace process and also the necessary space and scope for
developing the civilian security capabilities.
357

German security policy is oriented towards a comprehensive and collective concept
of security and security policy. Germany’s political leadership substantiates its international
engagement by reasoning that in the long run national security can only be
promoted and guaranteed in the globalized world by strengthening international security
and order. This concept is supported by the majority of the population.
Yet, despite these successes, the course of German security policy and the Bundeswehr
are still subject to debate. One reason for this is the high costs incurred by a comprehensive
security policy. The implementation of this concept still requires signifi cant
fi nancial, material and human resources. The Bundeswehr’s long-term deployments and
structural reform processes at home focussing on the interlinkage and integration of the
armed forces on national and international levels are a strong cost factor. In view of tight
budgets a signifi cant increase of the Bundeswehr’s funding cannot be considered, and
therefore the Bundeswehr is still suffering from a certain lack of funds.
Yet another reason is that the Bundeswehr is appreciated for its contribution to collective
security and to international peace, but its contribution to defence is increasingly
doubted both by politicians and by the public. Thanks to stable security in Europe an
attack on Germany’s territory is very improbable, but there are still threats to its national
security because of international terrorism and the proliferation of weapons of mass destruction,
to which politics has not yet found satisfactory answers. After the “war on terror”
has failed only a few people in Germany believe that the military can make a meaningful
contribution to solving these problems. In view of unresolved security challenges
and the high costs of military missions, politicians are repeatedly forced to substantiate
the benefi t provided by the Bundeswehr and its contribution to security.
In 2020, the Bundeswehr is on its way to becoming a postmodern army. The guiding
principles of national defence which had shaped the ideology, structure and missions of
the military in Europe for centuries hardly play a role any more. Instead the Bundeswehr
considers itself an element of a comprehensive and collective security policy. This is refl
ected in its missions and also in its structure, which is increasingly characterized by the
interlinkage with civil structures and the integration in international institutions.
358
III.3 “Winning the war” – back to the defence army
Uncertainty in Germany is growing. The awareness of living in a region of security
and peace prevailing since the end of the East-West confl ict in Germany has given way to
a feeling that there is a new direct threat. The second “nuclear era” has begun. The proliferation
of weapons of mass destruction has dramatically accelerated in recent years. All
previous attempts of the West to mitigate and monitor the proliferation of nuclear weapons
have failed. Due to unrestricted proliferation even economically weak, authoritarian
and socially unstable states are developing into military and nuclear superpowers. In the
Middle East the nuclear arms race has created an explosive confl ict situation in Europe’s
immediate neighbourhood.
According to international experts, Saudi Arabia and Egypt have come close to “nuclear
maturity”. There is proof that Iran has “the bomb” and is even testing a cruise missile
(Shehab 5) whose range is said to reach Central Europe. The Iranian leadership is
now testing its new strength as a nuclear power, thus enhancing its international course
of confrontation. The Teheran government aims at weakening US hegemony in the region
to establish Iran as the new power in the Middle East. To strengthen its own position

in the region the regime tries to attract smaller countries of the region to join a common
defence alliance under Teheran’s nuclear shield, stylizing itself as the “champion of the
suppressed Islamic world” in the confrontation with the West.
In a counter-reaction the USA and Europe try to isolate Iran economically and politically.
However, the USA is also threatening military measures. The undertones in
the confl ict are sounding increasingly aggressive. The Iranian leadership is threatening
openly to make a nuclear strike “against the Western alliance” should the USA genuinely
provoke Iran or one of its allies with military means. The Iranian president recently declared
in an emotional speech: “Our missiles are also pointing at Europe.” Thus all of a
sudden Europe is moving into the focus of a new nuclear confrontation.
The call for defence against the nuclear threat is heard all over Germany. The political
elites in Europe and Germany have started rethinking their security policies. The concept
of a comprehensive security policy has been relegated to the background and strategies
of military deterrence and containment are dominating the debates. National defence
has once again clearly reached the top of the security policy agendas instead of collective
security and global peace.
The Bundeswehr is undergoing profound change. The White Paper of 2020 is proclaiming
the consistent conversion of the “intervention army” into a “European defence
army of the 21 st century”. During the presentation of his White Paper, the Minister of
Defence declares that national security requires military dominance, as the experience
with the East-West confl ict shows: Europe can only protect itself by credibly illustrating
that it “can win the war”. The reform agenda for security policy is outlined as follows:
focussing the Bundeswehr on its defence mission, re-establishing a clear differentiation
between civil and military security policy, step-by-step withdrawal from international
peace missions with the exception of some strategic foreign missions, especially in the
Middle East; focussing the military transformation on the expansion of high-tech defence
and deterrence capabilities, especially to advance a European missile defence system in
co-operation with the US National Missile Defense programme.
A broad majority in politics and amongst the public is supporting the change in security
policy. There is even little resistance when the defence budget is increased at the
expense of the social budgets to fund the restructuring and technical modernization of
the Bundeswehr. It seems that the population is prepared to pay a higher price for its
security under the new threat scenario.
As a defence alliance NATO is experiencing a political renaissance in Europe, due in
part to Europe’s participation in American arms technology within the scope of NATO.
The US government is supporting the reorientation of the transatlantic alliance on the
defence mission. From its viewpoint, however, NATO remains only one possible option
for action among several. Compared to NATO, the EU is signifi cantly losing its relevance
in security policy because it lacks an effective defence policy.
In the year 2020, the Bundeswehr is on its way back to becoming a defence army.
At the beginning of the century security policy in Europe was still clearly characterized
by the challenge of asymmetrical non-governmental threats, whereas now states, with
their military and nuclear potentials, are once again in the focus of the Western threat
analysis. In view of the perception of a direct threat to Germany’s existence the aspect
of national defence is coming to the fore in security thinking. There is a recollection of
the traditional mission of the military as an instrument of defence and deterrence. Even
though the new national defence due to technical progress in arms technology, looks
quite different from the defence strategies of the past.
359

360
IV. OPTIONS AND RECOMMENDATIONS FOR ACTION
The above-mentioned scenarios illustrate that the German security policy will be
facing a multi-faceted challenge in the years ahead. It will have to make sure that the
new course of a comprehensive and integrated security policy is consistently continued
and applied. This requires new instruments, structures and strategies for the national
level and the integration of security policy on the international level, especially in the
EU. At the same time, however, German politics must not lose sight of those “risk
factors” which might fundamentally question the new course in security policy. This
includes the looming threat to international security from weapons of mass destruction.
It also includes domestic factors that are decisive for a consistent and sustainable
security policy.
IV.1 Consistent and effi cient realization of the concept of comprehensive security
policy
There is no doubt that Germany has made major efforts in recent years to implement
a comprehensive security policy. However, to close the gap between ambition and realization
of this concept, German politics must make further steps 14 .
In that respect the availability of a comprehensive set of instruments of security policy
is certainly the smallest challenge. Germany already has a broad spectrum of civil
and military capabilities. This set of instruments is also available on the multilateral level
within the scope of the EU. There is a defi cit, however, with regard to the real availability
of civil actors, since most of the specialists (police, lawyers, experts in administration and
business) are tied to domestic tasks. It would be great progress if permanent pools of
skilled staff and executives could be established for civilian security missions. The central
challenge, however, is not the availability of individual skills, but availability within
the interaction of the entire set of instruments. A combined civil and military security
policy which is interconnected and preventive requires integrated thinking beyond traditional
ministerial boundaries in foreign and security policy. It would be a positive signal
if a general concept – e.g. a national security strategy – could be elaborated on the basis
of interlinkage and prevention. In contrast to the White Paper, the strategic statements
should not focus on the military but should include all relevant actors and instruments
in a well-balanced fashion. The recent proposal to embed each foreign mission of the
Bundeswehr in a civil/military concept appropriate to the mission country would also
constitute a step in the right direction.
Germany must reform its security structures and institutions to effi ciently implement
the idea of a comprehensive security policy. This applies to the development of effective
coordination and co-operation structures amongst the various security related ministries
and actors at the national level. First and foremost, however, this challenge applies to the
international integration of German security policy. Integration within the scope of the
EU is also of utmost importance for the implementation of Germany’s concept.
14 See Michèle Auga’s contribution to the series Kompass 2020; Krisen und Kriege in einer entgrenzten
Welt, Anforderungen an eine deutsche Friedenspolitik, Kompass 2020, Friedrich Ebert
Foundation, Berlin, March 2007.

IV.2 Europeanizing security and promoting “effective multilateralism”
In recent years the EU has made major progress in security co-operation and establishing
common security structures. The multilateral integration of security policy must
be continued with courage and determination even though EU scepticism is on the rise
among political elites and the public alike. Europeanizing security would not only contribute
enormous synergy potential in the military realm, but also the perspective of a
new civil/military, multi-laterally integrated security policy. On the European level, however,
integration of the different capabilities of security policy is still a major task: on the
vertical level regarding the interlinkage of civil and military instruments, but especially
on the horizontal level with regard to the integration of the 27 national sets of capabilities
of the member states. By defi ning a courageous political vision, such as a “European
army”, the EU could send out a meaningful signal that helps to mobilise the necessary
political will. Besides this long-term vision, that might only be realized after 2020, the
EU’s short-term aims should be the following: development and expansion of joint training
(civil and military actors), further strategic manifestation of European security policy,
mainly the development of a common military doctrine and common “rules of engagement”,
as well as strengthening the common security policy. Regarding the latter many
proposals are already under discussion (ranging from a EU Foreign Minister to a civil
commander for ESDP). It is crucial, however, not to restrict reforms to the transfer of the
traditional structures of the nation state to the European level, but also to realize the concept
of a comprehensive security policy by enabling institutions to deliver an integrated
civil-military response to crisis.
A common European “voice” in security policy would also enormously increase the
EU’s political room for action on the global level – be it regarding solutions for international
crises and confl icts or shaping and strengthening global structures. The idea of
an “effective multilateralism” is crucial in this context as a guiding principle. In the era
of global interdependence, German and European security does not only depend on the
(unilateral) defence against certain threats, but also on an effective international order
enabling global politics to be shaped in an effi cient manner and in the interests of all. The
goal of German and European politics has always been to substitute “the law of power”
by “the power of the law”, on the European, but also on the international level. As a matter
of course the European security strategy defi nes “effective multilateralism” as one of
its three strategic goals. To promote this idea even beyond Europe, in particular vis-à-vis
its most important partner, the US, multilateral solutions must be shown to work. Current
challenges in international security, be it in the Middle East peace process, in the
stabilization of Iraq and Afghanistan, or in the nuclear confl ict with Iran, offer Europe
many reasons to start to put “effective multilateralism” into practice.
IV.3 Revitalizing the international disarmament and non-proliferation policy
The nuclear challenge is underlining the need for multilateral solutions. The current
proliferation of weapons of mass destruction (WMD) represents a massive threat to the
German and international security 15 . The European Security Strategy even calls prolifera-
15 See Hans J. Gießmann’s contribution “Abrüstung ade?” in the series Kompass 2020, Friedrich
Ebert Foundation, Berlin.
361

tion “potentially the greatest threat to our security” 16 . The political attention directed to
this threat has nevertheless dwindled since the end of the East-West confl ict, since nuclear
weapons are no longer pointing at Europe. The German and European security policies
have not yet found a satisfactory answer to this threat. In individual cases such as Iran, Europe
is actively supporting an international solution but there is still no active multilateral
policy of non-proliferation and disarmament going beyond the individual cases.
Proliferation is no longer an isolated case. On the contrary, it already covers entire
regions. In particular the developments in the Middle East and South Asia are reason
for concern. Even the established nuclear powers are currently sending out signals of
re-rather than disarmament. France and Great Britain, for example, recently decided to
modernize their nuclear weapons programmes. The USA is even going one step further
with its so-called “mini nukes” programme. 17 With this programme the US, for the fi rst
time, is assigning a tactical role to nuclear weapons and thus moving beyond the realm
of deterrence. The non-proliferation policy of the international community, especially
the Non-Proliferation Treaty (NPT), is based on the principle of mutual commitment: the
non-nuclear states renounce nuclear weapons while the nuclear states resolve to take
steps towards disarmament. Currently this principle is being eroded by both sides.
In view of this development it is even more worrisome that negotiations on the NPT
came to a halt some years ago and that there are no resolute initiatives to revitalize the international
system of non-proliferation, disarmament and arms control. As a non-nuclear
power and pacemaker of the Non-Proliferation Treaty, Germany has a great responsibility
to stand up for nuclear disarmament with determination and credibility. Germany
should not limit its efforts to the current “problem cases” of Iran and North Korea, but
should instead, together with its European and transatlantic partners, look for ways and
means to once again give the global non-proliferation regime meaning and credibility. 18
362
IV.4 Focussing and legitimizing the military engagement
For its implementation, the new German concept of a comprehensive security policy
requires considerable political and fi nancial means. Already today, the international deployments
of the Bundeswehr are already causing high burdens on Germany. However,
it is unlikely that the resources provided for security policy will increase in Germany in
the foreseeable future. Therefore, priorities must be set to fulfi l the international commitments
accepted by Germany without risking an “overstretch” of national security resources.
In particular the military engagement abroad needs a stronger focus. Germany
has already shouldered various long-term commitments with the Bundeswehr’s current
missions. Decisions on new military missions should be considered even more carefully.
The deployment of the Bundeswehr must not become a matter of routine as it always represents
major fi nancial and political commitments with great risks to the lives and health
16 The German White Paper only states that the proliferation is „gradually becoming a potential
threat for Germany.”
17 „Mini nukes“ are nuclear bombs with reduced explosive force which can also be used for
tactical purposes like the explosion of subterranean bunkers.
18 See the „Vier-Punkte-Plan zur nuklearen Abrüstung“ adopted by the SPD in June 2006 and
Rolf Mützenichs position paper „Zur Außen- und Sicherheitspolitik der SPD: Für eine Revitalisierung
von Abrüstung und Rüstungskontrolle“, both on the Internet under: http://www.spd.de/
menu/1689619/.

of the soldiers. Government and parliament are therefore obliged to carefully weigh up
ethical values and national interests, risks and opportunities, as well as cost and benefi ts
in each and every case.
There is no blue-print for how to take this decision. As a means of orientation for
decision-makers, the concept of the comprehensive security policy offers a framework of
conditions that must be fulfi lled before deploying the Bundeswehr:
First, the international mission must be embedded into a strong multilateral framework.
Ad hoc coalitions cannot guarantee the necessary amount of institutional integration
and political coherence required to realize a comprehensive security approach.
Second, the mandate for a military deployment may only be issued within the scope
and on the basis of a comprehensive mission or a comprehensive civil/military concept.
This means that the Federal Government must commit itself to providing civil instruments
and capabilities in parallel to deploying armed forces. Furthermore, when taking
a decision on deployment, it must be clear that the commitment accepted is generally of
a long-term nature even if the mandate is limited in time in order to allow for stronger
parliamentary control.
Third, military deployments require strong political legitimacy, both at home and
abroad. The most important sources of international legitimacy are International Law
and the mandates of the UN Security Council. This legitimation is irreplaceable to guarantee
broad international support for the mission (and thus also a sharing of burdens),
and to guarantee the acceptance of the mission, including in the crisis region itself. Furthermore,
military deployments must be properly legitimized on the national level by
corresponding democratic structures and processes. Thanks to the constitutive parliamentary
approval of any military deployment, the Bundeswehr’s foreign missions have a
stronger democratic legitimacy than in other European countries. The close tie between
the armed forces and Parliament is a strength of German security policy and must not be
undermined. Yet to guarantee the sustainability of German security and military engagements
even in the long run, the process of legitimation must reach beyond Parliament.
There is a current trend in German politics to present decisions taken by small circles of
the political elite as if there are no political alternatives. Particularly in the sensitive area
of military missions this practice is more than doubtful. Strong democratic legitimation
means that all options of security policy, including alternatives to a Bundeswehr mission,
are discussed with and amongst the public, instead of presenting decisions already
taken “as the will of the people and to garnish them with ethical arguments if they are
not immediately accepted by the masses” 19 . If this aspect is neglected, support at the
”home front”, especially the seemingly strong national consensus in German foreign and
security policy, might soon prove to be fragile.
Germany’s and Europe’s security environment is still undergoing change. The number
of factors and actors relevant for national and international security is growing, with both
positive and negative impacts. Due to this dynamism it is hard to anticipate the future
development of Germany’s situation in terms of security and threats. The three scenarios
presented here underline the broad spectrum of potential developments. The German
approach focussing on comprehensive management and resolution of international confl
icts as well as strengthening collective security and order (instead of focussing on the
military defence of the national security alone), is the right answer to this amorphous
19 The populism researcher Niels Werber in the Frankfurter Rundschau („Ja, das sagte ich“),
April 5, 2005.
363

and dynamic environment. The implementation of this approach, however, will in future
require enormous efforts by German security policy, including the Bundeswehr. The
“friendly disinterest” of the majority of the public does not suffi ce to ensure success on
this path. The central challenge in German foreign policy still is to enhance the political
and public awareness regarding the security challenges of the future, and also regarding
the answers national and international politics can offer to these challenges.
About the author: Stefanie Flechtner is a political scientist and director of the Bucharest offi ce of the Friedrich-Ebert-Stiftung.
364

TERRORISM IN THE 21 ST CENTURY
Peter R. Neumann
This article authored by Peter R. Neumann was originally published by Friedrich-Ebert-
Stiftung, Department for Development Policy, Berlin, 2008
ABSTRACT
Since 2001, global terrorism has become one of the biggest domestic and international
challenges for Germany. The paper outlines key infl uences that have marked the
transformation of terrorism over the last three decades. The paper highlights the threat
from Salafi jihadist terrorism, and how it has evolved since the September 11 attacks in
2001 and the subsequent ‘War on Terror’. But it also points to other potential sources of
future terrorism in Western societies, such as the anti-globalisation movement, right-wing
extremists, and evangelical Christians. The paper shows how German policymakers have
responded to these challenges. Though German counter terrorism policy is by no means
harsher than comparable policies in other European countries, the German domestic ‘security
packages’ nevertheless touched on a number of specifi cally German ‘taboos’.
Internationally, Germany has been keen to emphasise a more multilateralist approach,
opposing the Iraq war and stressing the need to address the root causes of terrorism
rather than merely its violent manifestations. Berlin participates actively in all international
forums and plays a positive role in pushing for a more integrated framework
based on fi ghting terrorism through the rule of law. However, the German engagement
in the international Afghanistan mission suffers from strategic weaknesses, lack of initiative,
and high domestic disapproval ratings.
Forecasting future developments, a fi rst scenario – ‘Al Qaeda resurgent’ – presupposes
that Al Qaeda will re-establish some of its pre-2001 capabilities in the tribal areas of Pakistan
and will continue to represent a substantial threat to the region and the West. A second scenario
– ‘leaderless jihad’ – assumes that the process of diffusion will continue and that, by
2020, Al Qaeda will have evolved into a more or less meaningless label, with groups of leaderless
cells engaging in uncoordinated, small-scale, albeit potentially numerous attacks.
In either case, governments’ future anti-terrorism policies should focus on strengthening
resilience and fi ghting terrorism through the rule of law. At the domestic level, it will be
essential for countries like Germany to focus on community policing and helping Muslims
integrate into Western society. It will also be important to strengthen efforts at international
collaboration – whether ad hoc or through multilateral institutions. The relationship with
Pakistan needs to be deepened. More broadly, though, it will be important for Germany
to defi ne and establish its role in the international fi ght against terrorism – especially with
regards to its mission in Afghanistan – and then pursue it with vigor.
I. FRAMEWORK: THE CHANGING FACES OF TERRORISM
Terrorism is a method, which can be used by any person or group and for any kind
of motive. As a form of violence, terrorism tells us little about the people who employ
it, nor does the tactic itself explain why it is being used. Before embarking on a more
365

detailed analysis and projection of trends, it is therefore worth remembering that lumping
together and prescribing standardised solutions for vastly different violent confl icts
based merely on tactical similarity – that is, the use of ‘terroristic’ means – does not lead
to valid predictions. As Brian Jenkins put it, terrorism is merely the ‘thin crust atop a very
deep pie’, and it cannot therefore be understood without reference to the specifi c political
and societal conditions in which it occurs. Any attempt to derive wide-ranging insights
about the causes and possible solutions for particular violent confl icts based solely on
their ‘terroristic’ manifestations must fail.
With these limitations in mind, this section aims to identify some trends and developments
which help explain the context in which terrorism has been used as a tactic and
is likely to be used in the future. The following sub-sections will describe some of the
changes in the nature of terrorism, which – taken together – are frequently referred to as
‘new terrorism’; outline how the rise of Salafi jihadist terrorism and the resulting War on
Terror have changed the dynamics of Islamist militancy; and offer some informed comments
about other radical movements which may resort to terrorism in the future.
366
I.1 Old and new terrorism
In the late 1990s, it became obvious that terrorism had changed. Some analysts coined
the term ‘new terrorism’ in order to describe what they believed were fundamentally new
ways for terrorists to operate and express their violence. They also argued that the ‘new
terrorism’ had resulted from the forces of late modernity and, in particular, globalisation,
which had manifested themselves in three areas that will be discussed in the following
paragraph.
First, terrorist groups continue to be relatively small organisations, but their structures
have become more diffuse and their reach has extended into transnational space.
In contrast to the more formalised organisations of ‘old’ terrorism, ‘new’ terrorist groups
are often described as networks, because hierarchies have been replaced with personal
relationships. What matters is not someone’s formal rank but whom they know and
what kinds of connections they can facilitate. Furthermore, these structures often extend
be-yond national boundaries. Unlike old terrorism, which usually had a well-defi ned geographical
‘centre of gravity’ to which all the group’s activity could be related, some of the
new terrorists have no single permanent geographical point of reference. As the example
of Al Qaeda shows, the place in which most of the group’s operations take place may
not be identical to the place from which the majority of its recruits originate or where its
leadership is based.
Cheap international travel and modern communication technologies are partly responsible
for this transformation. For example, no longer restricted by geographical distance,
terrorist groups have been able to take advantage of ‘weak’ or ‘failed’ states with
lax security regimes in which to base their organisations and host training camps. At the
same time, there are wider developments which need to be taken into account. The demand
for transnational identities, for instance, cannot be understood without considering
global migration and the consequent splitting of identities, which made an increasing
number of people – especially, it seems, the second and third generation descendants of
immigrants to Western Europe – susceptible to ideas and ideologies that have no national
point of reference. Furthermore, the Internet has created an entirely new social environment
in which a sense of (global) community can be projected.

The second area in which signifi cant change has taken place is that of terrorists’
aims and ideologies. As Bruce Hoffman points out, whereas in the late 1960s, not a single
terrorist group anywhere in the world could be described as religiously motivated, by
the mid-1990s, their ‘share’ had risen to nearly one third of all terrorist groups. This
included Christian anti-abortionists in the United States, Jewish extremists in the West
Bank, the Buddhist inspired cult Aum Shinrikyo (responsible for the nerve gas attack
against the Tokyo underground in 1995), and various groups in the Muslim world ranging
from Hezbollah to Al Qaeda. Nationalism, of course, remains a strong motivator of
terrorism. However, it is important to note that – in many of the places where the kind
of nationalism adopted by terrorist groups used to be secular and/or left-wing – nationalism
is now mixed with religious themes. In the Israel/Palestine confl ict for example, the
(secular) PLO has made way for the (religiously inspired) Hamas. Likewise, in Chechnya
and Kashmir, formerly secular groups have now adopted religious themes and symbols.
Ideologically, the rise of religiously inspired terrorism can be traced back to the socalled
‘religious revival’ which began in the 1970s. Arguably, the renewed interest in religion
constituted a more or less consistent response to feelings of insecurity and uncertainty
that were caused by the encounter with late modernity and, then, globalisation. In that
sense – though seemingly anachronistic – the religious revival must be seen as thor-oughly
modern in its genesis and manifestations. Indeed, the politicisation of the revivalist movements
often resulted from the perceived failure of supposedly modern, secular ideologies
(especially in the Arab world) and/or the widening gap between ‘fundamen-talist’ lifestyles
and increasingly secular and liberal societies (especially in the West). In either case, these
confl icts demanded a radical transformation of society according to religious principles
and thus pushed some of their activists into the political sphere.
Third, terrorism has evolved as a method. Needless to say, even old terrorists often
killed civilians and – occasionally – their operations were aimed at producing large numbers
of casualties. In the era of new terrorism, however, mass-casualty attacks against
civilian populations seem to have become routine and intentional rather than ‘mistakes’
or ‘exceptions’, and terrorists’ use of weapons of mass destruction has for the fi rst time
become a real possibility. Indeed, all major databases recording terrorist incidents bear
out the rise of mass-casualty attacks in no uncertain terms. What databases often do not
record, however, is that the increase in lethality has been accompanied by an increase in
brutality. Partly, of course, this is refl ected in the deliberate targeting of civilian populations
– often through suicide bombers – but it also becomes evident when looking at
individual tactics, such as the public beheading of kidnap victims which would have
been unimaginable some decades ago. Whereas killing people used to be secondary to
the communicative effects that could be achieved through a particular terrorist action, it
now seems as if the two considerations – violence for violence’s sake and symbolic value
– have merged.
There are numerous plausible explanations for this trend. On the one hand, in an era
in which audiences are de-sensitised to seeing violence on their television screens and
media usage has become more diversifi ed, the threshold for what is considered shocking
or terrifying has risen, so that ever more gruesome and deadly attacks are necessary
in order for terrorists to ‘get through’, reach people and affect their attitudes and
behaviour. On the other hand, the trend towards greater lethality and brutality has been
underpinned by the decline of ‘universalist’ – especially left-wing – ideologies and their
replacement with ‘particularist’ ideas, which defi ne certain ethnic, religious or racial
367

groups as ‘others’, that is, as less human or less worth of consideration than their own.
Religiously inspired ideologies, of course, are one part of this trend, but such ‘identity
ideologies’ also underlie the activities of many nationalist groups.
Taken together, these trends – the diffusion and transnationalisation of terrorist
group structures; the rise of religiously inspired ideologies; and the greater lethality and
brutality of terrorist operations – constitute what is commonly referred to as ‘new terrorism’.
The term describes the major developments that have taken place in the past
three decades. It does not suggest, however, that the transformation has been uniform
and universal, and that all terrorist groups have now turned into mass-casualty producing
transnational networks. Nor does it mean that these new trends will be unimportant
and/or continue uninterrupted for the next decades. Forecasting is not as easy as drawing
a straight line from the past. Indeed, as will be seen in the next section, unexpected
events can play a major part in shaping the dynamics and wider framework within which
terrorism takes place.
368
I.2 Salafi jihadism and the War on Terror
The most signifi cant terrorist threat in recent years has come from the so-called Salafi
jihadist movement, which is often referred to as Al Qaeda. In Al Qaeda’s view, every Muslim
has an individual duty to defend the ummah through violence or ‘armed struggle’ (often
referred to by Salafi jihadists as jihad). The objective of this jihad is to eliminate the obstacles
that stand in the way of creating a single Muslim nation (the caliphate), which will unite the
community of believers (the ummah) and be governed by Sharia law as well as strict social
practices derived from a literalist interpretation of the Quran (known as Salafi or Wahhabi).
Al Qaeda justifi es violence against the secular regimes in the Middle East, non-Muslim
interests in the Muslim world, as well as outside infl uences that are judged to prevent the
rise of the ummah and symbolise, or contribute to, the continued suppression, exploitation
and occupation of the Muslim world. According to the most extreme interpretation of Al
Qaeda’s ideology, this may include all so-called unbelievers, or kaffi r.
Al Qaeda originated from the foreign – mostly Arab – fi ghters which participated in the
war against the Soviet occupation of Afghanistan in the 1980s. During the 1990s, Al Qaeda
increasingly concentrated on the so-called ‘far enemy’, that is Western powers who were
believed to sustain oppressive regimes in the Middle East. Its campaign of mass-casualty
attacks culminated in the September 11 attacks against the United States in 2001, which
killed 3000 people – more than any other terrorist attack in modern history. The United
States Government perceived Al Qaeda’s actions as an act of war and promptly declared
its own ‘War against Terror’, which was meant to eliminate Al Qaeda and – more broadly
– the conditions that were believed to have facilitated its emergence.
In addition to numerous measures aimed at improving ‘homeland security’ – such as
stricter border controls, emergency preparedness, restrictions on civilian air travel, etc.
– the ‘War on Terror’ led to two major foreign wars. The aim of the invasion of Afghanistan
in late 2001 was to deprive Al Qaeda of the sanctuary that it had been granted by the (then)
Taliban government, including several training camps in which Muslims from all over the
world were provided with the skills necessary to engage in violent jihad. The relationship
between the ‘War on Terror’ and the invasion of Iraq in early 2003, on the other hand, was
less clear. Al Qaeda had no presence in Iraq prior to the war, nor was there any direct link
between the September 11 attacks and the Iraqi regime. Still, some of the supporters of

the war argued that it was necessary to prevent Saddam Hussein’s suspected stockpile of
weapons of mass destruction from falling into the hands of terrorists. Others believed that
Iraq could become a ‘beacon of democracy’, which would eliminate the conditions of oppression
that had led many Muslims in the Arab world to support Al Qaeda.
The American-led War on Terror has produced mixed results:
– There have been no further attacks against the American ‘homeland’. Salafi jihadists
have carried out a series of terrorist attacks in Europe (most prominently, the attacks
in Madrid in 2004 and London in 2005), but – though shocking – these were on a
much smaller scale than the events of September 11. Furthermore, Al Qaeda’s safe
haven in Afghanistan has been eliminated, and most of Al Qaeda pre-2001 leadership
has either been killed or detained.
– Al Qaeda’s two leaders – Osama bin Laden and his deputy, Ayman Al Zawahiri – are
still at large, and – despite spending billions on pursuing Al Qaeda’s leadership– there
is no sign that they might be caught any time soon. Furthermore, Western forces are
now faced with a prolonged insurgency in Afghanistan for which there appears to
be no easy exit strategy. To make matters worse, Al Qaeda seems to have set up new
‘bases’ in the tribal areas of Pakistan, where the group is said to run training camps
and other vital facilities.
– Aspects of the ‘War on Terror’ are widely thought to have radicalized Muslims across
the world, providing Al Qaeda with a fresh pool of sympathizers and potential recruits.
This is especially true for the Iraq war, which – in the eyes of many skeptical
Muslims – confi rmed Al Qaeda’s narrative of the West at war with Islam. The same
applies to the detention of suspected jihadists at Guantanamo Bay, the ‘rendition’ of
suspects to countries in which torture is being practiced, and the systematic abuse at
Abu Ghraib prison in Iraq.
– At the same time, Al Qaeda has had its own backlash to deal with. According to
Richard Barrett, the United Nations’ highest ranking offi cial monitoring the activities
of the group, even in places where Al Qaeda used to be highly active – such as
Iraq, Algeria, Egypt, and Saudi-Arabia – the terrorist campaign has lost traction, not
least because of the number of innocent Muslims that have been killed in Al Qaeda
attacks. 1 A real watershed, it seems, has been Al Qaeda’s attempt to launch a civil
war in Iraq, with many suicide attacks against Iraqi Shiites which Muslims across the
world have strongly condemned.
In addition to the United States acting unilaterally and through ‘Coalitions of the
Willing’, there have been numerous initiatives by multilateral actors. For example, following
the September 11 attacks, the United Nations (UN) Security Council established
a Counter-terrorism Committee and adopted a number of resolutions aimed at curbing
proliferation. This was followed by a series of initiatives in the General Assembly, which
adopted a Global Counterterrorism Strategy in 2006. While partially successful in generating
a global consensus for the need to fi ght Al Qaeda, there continue to be substantive
political differences between member states (especially between the West and the Arab
world) over what constitutes terrorism more generally. This has hindered the adoption
of a defi nition of terrorism under international law, and has also made a comprehensive,
multilateral approach towards fi ghting terrorism impossible.
1 Richard Barrett, ‘Seven Years After 9/11: Al-Qaida’s Strengths and Vulnerabilities’, ICSR Future
Action Series, September 2008; available at www.icsr.info.
369

The European Union (EU) has made concerted efforts to improve counter-terrorism
coordination among member states. Particularly important have been provisions to facilitate
the extradition of suspects and judicial cooperation more generally. However,
measures aimed at pooling intelligence and other sensitive information, as well as more
wide-ranging proposals for centralizing counter-terrorism policy at the European level,
have been resisted by many member states. Especially the larger Western European
states regard the EU as too cumbersome and bureaucratic to facilitate the kind of quick
action that is needed in order to fi ght terrorism effectively. Some states are also reluctant
to share secret intelligence information through EU bodies, such as EUROPOL.
The future trajectory of the Salafi jihadist movement is diffi cult to predict. Though
there can be no doubt that Al Qaeda has lost support, it is too early to announce its
demise. Pakistan has unquestionably become the key ‘battleground’ for the foreseeable
future, because it is from here that most of Al Qaeda’s activities emanate. Furthermore,
there is a large pool of disenfranchised, aggrieved Muslims across the world – especially
in Europe – who seem to be willing to take action if and when the opportunity arises.
History tells us that terrorist ‘waves’ last for at least one generation or 30 years, and
– depending on origin – this one may have reached its peak but is far from over. The
Salafi jihadists may never accomplish their ultimate aim, but they have proven that they
can cause tremendous damage and loss of life in their attempt to do so.
370
I.3 Other threats
As pointed out earlier, terrorism is nearly always linked to radical, popular movements,
which produce violent splinters, and decided that only dramatic action can break the population’s
indifference and/or compel governments to take notice and change policy. In Western
countries – including Germany – there are three such movements, which have repeatedly
been linked to violent activities and whose activities may escalate in the future.
First, the anti-globalisation movement believes that the kind of globalisation currently
taking place is a mere continuation of imperialist practices whereby the political
and economic elites in the so-called Global North impose neo-liberal, exploitative practices
on the Global South. Extreme environmentalists, which are part of this movement,
have had no qualms about breaking the law and, on several occasions, have used acts of
violence to get their message across. Leaderless and decentralised groups like the Earth
Liberation Front, which has been active in North America and part of Western Europe,
are prototypes for the kind of terrorism that could come out of this movement alongside
the even less structured anarchist movement. Given their universalist ideological orientation,
however, it seems unlikely that such groups would resort to Al Qaeda-style masscasualty
attacks against civilians.
The second movement which has emerged in direct response to the pressures emanating
from globalisation is the anti-immigrant Right across Western Europe and North
America. Like the anti-globalisation movement, it opposes neo-liberal economic policies,
especially the liberalisation of trade and immigration, but it does so from a particularist,
identity-based perspective. The movement’s constituency consists of globalisation
‘losers’ in the West, that is, unskilled workers and those on low incomes who have been
exposed to increased competition and who feel that their identity as well as their livelihoods
are under threat from foreigners ‘invading’ their countries. So far, the movement
has largely manifested itself in the rise of populist right-wing parties in Western Eu-

ope, who have successfully competed in elections in countries like Belgium, Austria
and France, but there has also been a rise in the number of incidents in violent attacks.
There are frequent and ongoing discussions among neo-Nazis about the establishment
of a ‘Brown Army Faction’ similar to old left-wing terrorism in the 1970s and 1980s.
The right-wing extremist movement is highly networked already, and this would probably
be refl ected in any future terrorist group. Considering their particularist ideas, the
repertoire of tactics is likely to include not only assassinations of, say, prominent public
fi gures of foreign, Muslim or Jewish descent but also attacks against soft targets, such as
mosques and immigration centres.
Third, there continues to be a residual threat from non-Islamist religious groups, especially
evangelical Christian groups. This may be less relevant to Germany, but it certainly
plays a role in the United States, where parts of the evangelical movement have
merged with the racist, anti-government Right. In the literature, these groups are frequently
described as ‘millenarian’, because they believe in a fi nal ‘showdown’ before the
coming of a new Messiah. 2 Faced with a black President and a left-wing government,
such groups may interpret the new situation as the coming of a fi nal confrontation with
the forces of evil that requires them to strike out at their perceived enemies. There can be
no doubt that individuals or extremist groups within this movement will see themselves
and their way of life as being under threat, justifying nearly any action to change the
course of history.
It seems clear, therefore, that it would be mistaken to focus exclusively on Salafi jihadism
in terms of future terrorist threats. Rather, it is important to understand the wider
context within which terrorist threats emerge. For the foreseeable future – certainly until
the year 2020 – the conditions that will shape global terrorism are marked by the contradictory
effects of globalization and late modernity. Arguably, these forces have produced
Salafi jihadism, but they have also brought about other movements, including the antiimmigrant
right, the anti-globalisation movement, and even fundamentalist Christian
groups. Not all of them will embark on violent activities on the scale of the September 11
attacks against the United States, but they all possess the potential of engaging in terrorist
activities that will divide societies, target democratic institutions and their leaders, or
– at the very least – produce considerable social and economic damage. How these developments
have affected German policymaking will be the subject of the next section.
II. German Policy
Like other Western European countries, Germany had had to deal with terrorism
long before the rise of ‘new’ terrorism and Al Qaeda in particular. In the 1970s and 1980s,
the Red Army Faction’s campaign destabilized the constitutional order like perhaps no
other single threat in the post-war period. Furthermore, although there have been no successful
attacks against Germany in the post-September 11 period, the threats emanating
from Salafi jihadism and the War on Terror have affected Germany in multiple ways.
Soon after September 11, it became clear that the leader of the cell that was responsible
for the attacks and some of his associates had been radicalized in Hamburg and
2 See, for example, Mark Juergensmeyer, Terror in the Mind of God: The Global Rise of Religious
Violence, 3rd ed. (Berkeley: University of California Press, 2003), esp. Chapter 2 ‘Soldiers of
Christ’; D.J. Mulloy, American Extremism: History, Politics and the Militia Movement (London and
New York: Routledge, 2004);
371

used Germany as a safe haven. Germany’s initial support for the US-led War on Terror,
in particular the deployment of German troops to Afghanistan, made Germany a more
prominent target for Salafi jihadists. Despite its refusal to participate in the invasion of
Iraq, Germany was mentioned in several Bin Laden messages, and in 2006 and 2007, the
country barely escaped devastating attacks against civilian targets, which – on both occasions
– would have been on the scale of London and Madrid. There is no reason to believe
that this threat has subsided or gone away.
In the immediate aftermath of the September 11 attacks, the German government
– then led by Chancellor Gerhard Schröder – passed two so-called ‘security packages’,
which included a host of measures aimed at tightening up anti-terrorism legislation and
providing law enforcement and security agencies with more powers and resources. These
and subsequent measures were not unusually draconian or repressive when compared to
the policies implemented by other European countries, but they still touched on several,
specifi cally German dilemmas and ‘taboos’. For example, the creation of a joint terrorism
analysis centre (Gemeinsames Terrorabwehrzentrum, or GTAZ) in which relevant security
agencies would share information raised the question of the traditionally strict separation
between law enforcement and intelligence agencies. Likewise, there has been an
extensive debate about the deployment of armed forces inside Germany, which started
with the question of whether the government should have the power to order the Air
Force to bring down civilian aircraft. More broadly, much of the internal debate revolved
around where key competencies related to the fi ght against terrorism should lie, with
federal agencies pushing to have a greater say in areas which have traditionally rested
with the federal states.
In the area of foreign policy, despite Chancellor Schröder’s initial promise of ‘unlimited
solidarity’ with the United States, the German approach has been distinct from that of the
United States and several of its leading allies. As Wilhelm Knelangen points out, while
Germany agreed to participate in the War on Terror militarily, this has been balanced by an
emphasis on strengthening multilateral mechanisms (especially the United Nations) in the
fi ght against terrorism and the need to address grievances and ‘root causes’ that were believed
to be conducive to the emergence of terrorism. 3 As a result, Germany led the effort to
bring together (under the auspices of the UN) key actors from within Afghanistan and the
international community to negotiate transitional arrangements for the government of Afghanistan
in late 2001. Germany’s ‘softer’ approach towards counter-terrorism can also be
seen in the government’s refusal to participate in the more aggressive counter-insurgency
operations that are being carried out by the United States, Britain and other NATO allies in
the south of Afghanistan. Moreover, it helps in understanding the German government’s
outspoken opposition to the invasion of Iraq in 2003, which soured relations between the
United States and Germany until Schröder left offi ce in 2005.
Yet, while seemingly consistent, the German approach towards counter-terrorism –
especially its foreign policy component – has not yet had a signifi cant impact. In the area
of security policy, German capabilities – both military- and intelligence-based – are too
limited in order for Germany to be considered a signifi cant actor. The continued German
refusal to deploy troops in the south of Afghanistan is a cause of resentment among major
NATO allies and has put a signifi cant strain on NATO as a military alliance. Indeed,
3 Wilhelm Knelangen, ‘Die deutsche Politik der Terrorismusbekämpfung’ in Thomas Jäger,
Alexander Höse and Kai Oppermann (eds.), Deutsche Außenpolitik: Sicherheit, Wohlfahrt, Institutionen
und Normen (Wiesbaden: VS-Verlag, 2007), pp. 173-97.
372

while rejecting the ‘militaristic’ approach of the United States, Britain and others, Germany,
however, has not yet spelled out in detail its comprehensive approach to resolve
the ongoing problems in Afghanistan. With the exception of the Petersberg Agreement
in 2001 and the German G8 initiative to improve the bilateral relations between Afghanistan
and Pakistan, Germany has rarely been seen to take the initiative, reacting rather
defensively whenever other countries have asked to do more. In fact, despite Germany’s
commitment to reconstruction and peace-building, as well as its contribution – be it fi -
nancial or otherwise, Germany has come to be regarded by many of its key allies as a
second-rate player which follows rather than leads.
In the multilateral sphere, Germany’s contribution to the fi ght against terrorism has
been a sincere attempt to make international institutions – especially the UN and the
EU – more relevant, with Germany participating actively in all international forums and
playing a positive role in pushing for a more integrated framework based on fi ghting terrorism
through the rule of law. However, there are inherent limits to how effective such
efforts can be, given that there is no overwhelming desire by many countries to deal with
terrorism through multilateral institutions, or – as in the case of the UN – no consensus
on what terrorism constitutes (see previous section).
Germany’s policy of ‘muddling through’ may have worked so far, but it is unlikely to
represent a viable long-term policy. Considering the German population’s well-known
lack of enthusiasm for their country’s engagement in Afghanistan, Germany has become
a prime target for Salafi jihadists who have been keen to exploit such instances of political
discontent in the past (for example, in Spain in 2004). In the immediate future, therefore,
an Al Qaeda inspired attack against civilian targets in Germany and/or attacks against
German troops or German civilians in Afghanistan are the most likely terrorist threat scenarios.
To stop any potential attack from dictating policy on Afghanistan or any other question,
it is essential for German policymaking to become more consistent and proactive.
III. SCENARIOS
Drawing up scenarios for the future of terrorism is a risky business. Terrorist attacks
– especially of the kind that occurred on September 11 – are rare events. They are nearly
impossible to predict, yet – as we saw in 2001 – they can change not only the dynamics
of terrorism but the course of history.
The following two scenarios are not so much about the future of terrorism but rather
about the different ways in which the currently dominant terrorist threat – that is, that of
Salafi jihadism – may evolve in the next decade or two, taking into account the different
developments and infl uences that were sketched out in the fi rst section of this paper. The
scenarios are based on the most controversial debate that has taken place in the fi eld of
terrorism studies for years, with Bruce Hoffman of Georgetown University arguing the
fi rst scenario (‘Al Qaeda resurgent’) and Marc Sageman – currently scholar-in-residence
at the New York Police Department – advocating the second (‘leaderless jihad’).
III.1 Scenario 1: ‘Al Qaeda resurgent’
Scenario 1 is based on a pessimistic interpretation of intelligence reports according
to which Al Qaeda has managed to re-establish some territorial bases in the tribal areas
373

of Pakistan, 4 where neither the government of Pakistan nor, indeed, its British imperial
predecessor have ever managed to exercise effective control. Protected by tribal leaders
and the Pakistani Taliban, the group will be able to resurrect some of the infrastructure
and facilities it had lost as a result of the invasion of Afghanistan in 2001. Needless to
say, ‘with its rugged terrain and suspicion of outsiders’, 5 Al Qaeda will fi nd it diffi cult to
achieve the degree of sophistication and stability it once had in Afghanistan, but the territory
may nevertheless provide the group with the opportunity to regain a secure base
from which to establish control over its global movement, as well as direct and train its
supporters.
In the course of the next decade Al Qaeda may therefore regain at least some of the
strength and discipline it had lost following the September 11 attacks, with Pakistan
emerging as the ‘centre of gravity’ for its activities. This will have serious consequences
for the stability of the region. The group will attempt to continue its involvement in the
insurgency in Afghanistan, providing logistics, terrorist training and – possibly – Western
volunteers for what – by 2020 – might have become a long drawn-out, low-level war.
As a result of its coalition with the Pakistani Taliban, the group will increasingly engage
in operations against the Pakistani state or Pakistani society. Given the weak overall
structure of Pakistan, occasional Al Qaeda attacks against civilian, political and/or Western
targets in Pakistan will further weaken any attempt to bring stable governance to
the country. This might also complicate relations and lead to serious tensions with the
neighboring nuclear power, India, if it turns out – as, apparently, in the case of the recent
Mumbai attacks – that terrorist attacks in India or against Indian targets have been
planned or organised from Pakistan.
Al Qaeda differs from local ‘jihadist’ groups by having explicitly global aspirations,
and it will be in Al Qaeda’s interest, therefore, to open up its bases to foreign volunteers,
especially young Muslims from the Arab world and the West. The consequences of Al
Qaeda’s resurgence will therefore be felt far beyond the region. By 2020, an entirely new
generation of ‘jihadists’ will have gone through Al Qaeda’s training camps, who will have
returned to their home countries and re-created the kind of global network that emerged
in the 1990s. In addition to being trained in terrorist tactics, this ‘second generation’ of
Al Qaeda will harness the full power of the Internet to coordinate attacks as well as communicate
and propagate their views. Though not necessarily large in numbers, the new
generation will launch occasional attacks against civilian targets in Western cities. Given
the perpetrators’ training, these attacks are likely to produce large numbers of civilian
casualties. Attacks with chemical, biological, radiological or nuclear materials will have
been attempted, but – given the signifi cant constraints for non-state actors in making
these effective – there is only a small chance that they will succeed in creating signifi cant
damage.
As mentioned above, the dynamics that are likely to unfold are hard to predict. It is
safe to say, though, that Western powers will fi nd it hard to sit back and refrain from
any intervention, especially when it becomes obvious that a devastating attack against
a Western country was planned and organised from Al Qaeda’s base in Pakistan. This
is especially true for the United States. It seems clear, therefore, that – by 2020 – Western
countries will have become more involved in countering Al Qaeda in Pakistan. If Al
4 Bruce Hoffman, ‘The Myth of Grassroots Terrorism: Why Osama bin Laden Still Matters’,
Foreign Affairs, May/June 2008.
5 Barrett, ‘Seven Years’, pp. 10-1.
374

Qaeda manages to launch another September 11 type attack against the United States, a
fullscale intervention by the United States cannot be ruled out. This would have a devastating
effect on the situation in Pakistan by uniting the majority of the population against
the ‘foreign invader’ and probably suck the United States into another long drawn-out
confl ict with substantial casualties and unpredictable consequences not only for the region
but for global security more generally. 6 If, on the other hand, the Western involvement
consists of a continuation and, possibly, further intensifi cation of unmanned aerial
attacks against targets in the tribal areas, the consequences will be less dramatic, but
– given the likelihood of military ‘mistakes’ and civilian casualties – may still contribute
to the radicalisation of young Muslims across the world. In any case, the fragile position
of Pakistan’s government will be further undermined, with diminished prospects for stability
in the region.
III.2 Scenario 2: ‘Leaderless jihad’
Marc Sageman believes that there is little reason to be concerned about Al Qaeda’s
alleged resurgence in the tribal areas of Pakistan, which he believes is either irrelevant or
vastly overstated by Western intelligence agencies. From his perspective, the really significant
development has been the diffusion of Al Qaeda and the Salafi jihadist movement
in the years since 2001 and the kind of ‘leaderless jihad’ it has produced. While Sageman
concedes that Al Qaeda used to be a more or less centralized organization – albeit one
with franchises all over the world – prior to the invasion of Afghanistan, in subsequent
years it has reversed the fl ow of command and control: rather than top down, it now
functions from the bottom up. Formal hierarchies no longer matter, and while Bin Laden
and his deputy may still be important symbols – like Che Guevara during the Cold War
– their role is merely inspirational. In Sageman’s view, ‘each local network carries out its
attacks without coordination from above… [Al Qaeda] lacks a fi rm overarching strategy,
[yet] it still has an agenda set by general guidelines found on the Internet, which is the
virtual glue maintaining a weak appearance of unity’. 7
This means that, by 2020, Al Qaeda will have become an increasingly meaningless
label that is adopted by aggrieved Muslims across the world in order to justify violent
attacks against targets in their home countries. There will be more attacks, but – given
the recruits’ lack of training and coordination – they will be smaller in scale. Many of
these attacks will fail to produce any signifi cant casualties. Rather than spectacular
attacks, like the September 11 attacks against the United States, Al Qaeda inspired
attacks in 2020 will resemble the attempted car-bombing of Glasgow Airport in 2007,
which – because of the faulty construction of the bombing and device and the lack
of planning – produced no casualties at all. Such attacks may still cause a degree of
panic, instability and divide societies – especially when they are carried out by local,
home-grown networks of young Western Muslims – but they are unlikely to trigger
large-scale interventions. As a result, the focus of counter-terrorism policy will shift
from foreign to domestic policy.
In the leaderless jihad scenario, it will become more diffi cult to recognize a clear
strategy, or identify concrete grievances to which terrorist attacks could be seen as a
6 I am grateful to Anatol Lieven for this insight.
7 Marc Sageman, Leaderless Jihad: Terror Networks in the Twenty-First Century (Philadelphia:
University of Pennsylvania Press, 2008), p.
375

esponse. Since neither Bin Laden or any of his lieutenants will have the power to frame
terrorist attacks according to a single narrative, local groups will respond to a variety of
pressures and perceived grievances, ranging from foreign spill-overs – the situation in Pakistan,
Israel-Palestine, and/or other international confl icts – to the purely local, including
‘symbolic’ disputes such as the so-called ‘cartoon crisis’. Many of these issues will
be raised and articulated in seemingly anarchic web forums on the Internet, and it will
consequently be diffi cult to identify particular triggers that cause individual and groups
of recruits to turn to violent action.
By 2020, therefore, the Al Qaeda phenomenon will have degenerated into a form of
violent youth culture, which is perpetrated by amateurs who often do not possess the
skills, training, resources and strategic direction to carry out attacks that would have
signifi cant strategic consequences. If Western powers refrain from launching large-scale
interventions in the Muslim world that are prone to re-igniting the cycle of radicalisation,
it is possible that Salafi jihadism will have reached the tail end of the 30 year period in
which terrorist ‘waves’ typically evolve. While there may still be young Muslims who are
attracted to the movement and its message, mainstream Muslim communities will have
decisively turned against it and the numbers of sympathizers and supporters will have
decreased signifi cantly. By 2020, therefore, the phenomenon of Al Qaeda and Al Qaeda
inspired terrorism will be in the process of fading away.
376
IV. RECOMMENDATIONS
This chapter will not detail recommendations for how terrorism should be fought in
general. There exists a wealth of literature on counter-terrorism, and it would neither
be wise nor possible to attempt to summarise this literature here. 8 Rather, the aim of
this chapter is to outline specifi c options for action based on the analysis presented
above. The following sub-sections will cover options for German foreign policymaking;
implications derived from the discussion of scenarios; and some general guidelines
on how to minimize the impact of the changing framework within which terrorism is
likely to take place.
IV.1 German foreign policy
The incoming U.S. administration presents German foreign policymakers with a
unique opportunity but also a challenge. The new American government’s instincts are
closer to the strategy originally articulated by the German government than those of the
Bush White House, and this will present Germany with a unique opportunity to gain
infl uence and steer the ‘War on Terror’ – or whatever it may be called – into a more productive
direction. The following actions should be considered:
Help develop a comprehensive plan for international engagement in Afghanistan
Germany needs to end its policy of ‘muddling through’ and become a leader in the
discussion of how to proceed with international engagement in Afghanistan. Together
8 For an excellent overview, see Ronald Crelinsten, Counterterrorism (Cambridge: Polity Press,
2008).

with the United States, Germany should take the initiative and develop a positive, coherent
plan that will refl ect a better balance between ‘soft’ and ‘hard’ measures.
Invest in capabilities
To be successful in shaping the international agenda will require a willingness of
Germany to play a more prominent part in all aspects of the global struggle against terrorism.
This means further investment in the capability of German military and intelligence,
which has been lagging behind that of its allies for many years. Only by improving
its capabilities in these areas will Germany gain the leverage necessary to infl uence
discussions about other aspects of policymaking in this area.
This also implies that German rhetoric on reconstruction and peace-building needs
to be matched by action. If Germany wants to be seen as a ‘force for good’ in places like
Afghanistan, it needs to show leadership by investing more signifi cantly than hitherto in
programmes that are likely to promote this agenda.
Win the population’s support
German policymakers have failed to explain to the German population why German
participation in missions like Afghanistan is useful and necessary. The result has been
a lack of support and a potential vulnerability that may be exploited by terrorists. If the
German government is convinced that its participation and presence in Afghanistan is
useful and desirable, it must make a stronger and more consistent case for it.
IV.2 Responding to scenarios
Arguably, both scenarios outlined in Chapter 3 contain some truth. Al Qaeda seems
to have embedded itself in the tribal areas of Pakistan, yet there has also been a diffusion
of structures which has made the movement more diffi cult to deal with. Policymakers,
therefore, will have to prepare for both possibilities. The following recommendations are
priorities for action:
Deepen the relationship with Pakistan
Whatever happens in the tribal areas, it seems near-certain that Pakistan will be a
‘centre of gravity’ in the fi ght against global terrorism for years to come. The aim for all
Western governments should be to help the Pakistani government to improve its capacity
to fi ght terrorism, but also to stabilize its position vis-a-vis the Pakistani population,
normalize its relationship with India, and prevent nuclear materials from falling into the
hands of terrorists or foreign regimes.
Coordinate action with regards to Pakistan with Western and regional powers
In deepening international involvement in Pakistan, it will be important to coordinate
German actions closely with the two Western powers that, for both current and historical
reasons, have the closest relationship with the Islamabad government, namely the
United States and Britain. This will be of benefi t to Germany not only in that resources
are multiplied but also in having infl uence over potentially negative interventions. Where
possible and useful, multilateral institutions may also have a role to play, though it would
be dangerous to overrate their ability to bring about quick and positive change.
377

Focus on community policing
The second scenario requires a more local focus, refl ecting the fact that the threat will
emanate primarily from ‘home-grown’ networks. This implies that governments need to
get to know their communities better. Investment in community policing – including the
recruitment of ethnic minority police offi cers – should therefore be a priority alongside
the building of social capital within minority communities, so they are in a position to
address grievances – real and perceived – through the democratic political process rather
than having to resort to violence.
Work on integration and citizenship
European governments, including Germany, also need to continue to work on issues
like citizenship and integration as well as promote a positive narrative of what it means
to be Muslim and German, both within communities and in cyberspace. Ultimately, the
threat from Salafi jihadism will only subside in Western European societies once better,
more inclusive societies have been constructed in which the narratives of exclusion and
alienation will no longer resonate.
378
IV.3 Dealing with future crises
Given the wider context within the ‘new’ terrorism has emerged – that is, late modernity
and globalization – it will be important for populations to understand that the risk
from terrorism can be minimized but that it cannot be eliminated entirely. In order to
deal with future crises, the following actions should be taken:
Strengthen resilience
However destructive and shocking, terrorism is unlikely to destroy democracy or our
‘way of life’ unless people or the government overreact. It will be crucial, therefore, for
governments to develop a communications strategy that explains how terrorism is a serious
threat to law and order, but that the terrorists cannot win as long as people respond to
the threat in a measured way. Government communications should highlight the criminal
nature of terrorist activities (thereby refusing to accord them political legitimacy) and emphasise
how they are carried out by a small minority within the Muslim population.
Develop a robust legal framework within the rule of law
Terrorists aim to divide societies, and if governments engage in overly repressive
measures in order to show that they are ‘tough’, they risk alienating sections of society
whose support is crucial in defeating terrorism. Measures, such as profi ling or detention
without charge, that are aimed at one particular segment of society in a seemingly
non-discriminatory fashion, are likely to be counterproductive and wholly negative, and
should therefore be avoided.
Especially following a terrorist attack, the pressure from public opinion to engage in
harsh and punitive policies will be considerable, but this must be resisted. History has
shown that, in the long term, good policework and the pursuit of terrorists through the
courts of law are by far the most reliable means of countering the threat without incurring
a backlash. Measures can and should be robust, but they should always be perceived
as legitimate and within the rule of law.

Improve international collaboration
New terrorism routinely crosses borders, and it has consequently become more diffi
cult to deal with at the domestic level. It will be important, therefore, to improve measures
aimed at facilitating international collaboration. In doing so, however, it will be
important to be pragmatic about the kinds of frameworks through which international
solutions are being pursued. At times, it will be possible to establish international legal
frameworks or work through multilateral institutions. In certain situations, however, ad
hoc coalitions will develop from the bottom-up, with more formalized structures only
emerging at a later stage.
Monitor other potential sources of terrorism
The threat from Salafi jihadism is by far the most signifi cant terrorist threat at this
point in time, but it will be important for governments to keep monitoring other potential
sources of terrorism, especially terrorist activities on the far Right. Neo-Nazi attacks
against Muslims and Islamist terrorism may have a self-perpetuating effect, and it is essential,
therefore, not to focus on one at the expense of the other.
On the author: Peter R. Neumann is Director of the International Centre for the Study of Radicalisation and
Political Violence at King’s College London. He is the author of Old and New Terrorism (Polity 2008).
379

380
CRISES AND WARS IN TIMES OF GLOBALIZATION
Michèle Auga
This article authored by Michèle Auga was originally published by Friedrich-Ebert-
Stiftung, Department for Development Policy, Berlin, 2007
ABSTRACT
Wars between states have been largely superseded by new forms of violent confl ict.
These cannot be contained using the conventional procedures of international law. The
circumstances of this new century call for a policy of prevention, for a widening of the
notion of security to include non-military categories, for sustained state-building and for
civil confl ict transformation. So-called “new wars” are resulting in the privatisation of the
use of force, transnational criminality and also terrorism. Despite the general tendency
towards the erosion of nation statehood, however, the state must remain the principal
regulatory model of international politics. If its status as such is eroded, the probability
of confl icts deteriorating into violence will increase. The erosion of the state’s control
capacity facilitates the emergence of civil war economies and so-called “shadow globalisation”.
State decay is not an unforeseen, randomly occurring problem; state decay can
be seen to be coming long before the event. A fundamental challenge for the future therefore
is to strengthen endangered states using the tools of state-building. A distinction
must be made here between state-building and nation-building, which is not a priori
geared to peace-building. There is a need to go beyond analysing the core functions of
the state and turn the focus to good governance, the equitable distribution of resources
and civil society.
There is today a broad-based consensus in Germany that peace-building is a challenge
which calls for a coherent approach across the various fi elds of policy-making, with
a decisive role being assigned to development cooperation policy. The notion of “civil
confl ict transformation and crisis prevention” has successfully found its way into the
debate on foreign policy. Civil society actors and their confl ict-regulating potential are
becoming increasingly important. Various German policy documents stress the concept
of prevention. This paper subjects the current security-related reasoning, planning and
actions of German foreign policy in matters of peace-building to scrutiny on the basis of
a number of scenarios. Do the current priorities stand up to the scenarios of the world
in 2020?
The fi ndings show that Germany is not yet making optimal use of the existing potential
in terms of instruments, actors and fi nancial resources. Policy corrections are both
possible and necessary if the crises besetting the world in 2020 are not ultimately to lead
to crises in Germany as well.
The recommendations for a far-sighted German peace policy include the drafting of
a national security strategy, interministerial concepts, strategies and sets of criteria on
state-building, a review of the existing fi nancing instruments, public relations work for
civil confl ict transformation, improved governmental and non-governmental cooperation,
and the development of European coordination strategies to unleash synergies.

I. CRISES IN TIMES OF GLOBALIZATION – HOW GERMAN CRISIS PREVENTION
AND PEACE BUILDING COULD HELP
“Need is confl ict. Where there is hunger, there will be no durable peace. Where there
is abject poverty, there will be no justice. Where human existence and its simple needs
are daily under threat, it is not admissible to speak of security.” 1
I.1 In the shadow of globalisation: hunger, violence and state decay 2
As long ago as 16 years before the end of the East-West confl ict, on 26 September
1973, in a far-sighted speech before the United Nations, Willy Brandt defl ected attention
away from the confrontation between systems to the structural factors which are today
often seen as the origins of so-called “new wars” 3 and the outbreak of violent confl ict. He
thereby laid the foundations for what, in 1994, was to become the concept of so-called
“human security”. Drawn up by the United Nations Development Programme, the concept
contained the demands repeatedly voiced by Kofi Annan at the 2005 Millennium
Summit for “freedom from fear” and “freedom from want”. It contrasted the hitherto
state-centred approaches to international politics with a new concept which centred on
the individual and postulated that stability cannot be achieved in any given region as
long as the people there remain exposed to various forms of threat. However, the UN
has also had recourse to the notion of “human security” in its reactions to the increasing
social vulnerability emerging within the context of globalisation and the privatisation of
public resources. Accordingly, Annan called for “[a] comprehensive concept of collective
security: one that tackles new threats and old and that addresses the security concerns
of all states”. 4 The security needs of states in the world of the 21st century may be very
diverse, but on the other hand, the Secretary-General argued, “new insecurities” are a
threat to the entire international community: “civil violence, organized crime, terrorism
and weapons of mass destruction. They also include poverty, deadly infectious disease
and environmental degradation since these can have equally catastrophic consequences.
All of these threats can cause death or lessen life chances on a large scale. […] On this
interconnectedness of threats we must found a new security consensus, the fi rst article
of which must be that all are entitled to freedom from fear, and that whatever threatens
one threatens all.” 5
The framework for international politics has changed drastically. Wars between states
have been largely superseded by new forms of violent confl ict which cannot be contained
using the conventional procedures of international law. The term “intra-state” wars, how-
1 Brandt, Willy: Berliner Ausgabe, Band 6: Ein Volk der guten Nachbarn. Bonn. 2005. p. 504.
2 The members of the Confl ict Transformation Team of the Friedrich-Ebert-Stiftung were heavily
involved in preparing, discussing and drafting this paper. Special thanks are due to Anja Dargatz,
Ralf Hexel, Britta Joerißen, Marei John and Annette Lohmann.
3 See Kaldor, Mary: Neue und alte Kriege, Frankfurt a.M. 2000; Münkler, Herfried: Die neuen
Kriege, Reinbek bei Hamburg 2004; and Pradetto, August: Neue Kriege, in: Gareis, Sven Bernhard
und Klein, Paul (Hg.): Handbuch Militär und Sozialwissenschaft, Opladen 2004,who questions the
notion.
4 In larger freedom: towards development, security and human rights for all; report of the Secretary-General
/ United Nations, General Assembly. March 2005. [New York] 2005. p. 62.
5 Ibid.
381

ever, is not an entirely apt description of the new phenomenon. In many cases these
confl icts involve actors in neighbouring states, generate transnational fl ows of refugees
and thereby ignite confl agrations which affect entire regions. The characteristic feature
of so-called “new” wars is that their protagonists resort to unconventional methods for
which no provision is made in international law. According to Münkler, they typically entail
more cruelty and brutality against the civilian population and are more reminiscent
of the wars of early modern history than of the national wars à la Clausewitz. 6
Supposedly predictable national armies are replaced by protagonists such as paramilitary
units, rebel organisations, terrorist groups and criminal gangs. Even police forces
are behaving as laws unto themselves. The distinction between public and private is incrementally
becoming more blurred. The result is that the use of force is no longer the
prerogative of the state. 7 All 19 major armed confl icts waged in 2004 conformed to this
pattern. The renowned institute of peace research SIPRI has also drawn attention to one
recent case where the opposite was true: “In a reversal of the classic spill-over of confl ict
from intra-to inter-state, developments in Iraq during 2004 raised the prospect of an international
confl ict creating a fully-fl edged civil war.” 8
In the literature on peace-building, confl ict is seen as a necessary phenomenon of
societal change. Trust in social co-existence, the “freedom from fear” called for by Kofi
Annan, cannot develop, however, unless confl icts can be solved without having to fear
the use of force. For this, any type of community requires norms (constitution, political
culture) and institutions (courts, police force, parliaments, parties) and methods, instruments
and procedures (negotiations, minority rights), which prevent the use of force.
Civil confl ict transformation in this context means “having or establishing norms and
institutions which prevent the use of force in current and future confl icts.” 9 The recognition
of rules by society and acceptance that the state has a monopoly on the use of force
are fundamental prerequisites for this.
With the end of the Cold War and the associated transfer of attention to other crises,
the international community found itself brutally confronted with the fact that in many
cases the “state” itself had become a party to the confl ict, that governments – for example
that in Sudan – were attacking their own citizens. A “crisis of state integrity” was
increasingly frequently being named as one of the causes of confl icts escalating into the
use of force.
Despite globalisation and a tendency towards the erosion of nation statehood, the
state remains the fundamental regulatory model for international politics. If its status
as such becomes eroded, the probability of confl icts deteriorating into violence will increase.
State integrity and non-violent confl ict regulation are closely correlated. Because
of its regulatory function and status as a fundamental element in international relations,
a state which is in decay becomes a structural problem. It was only when Afghanistan
became a failed state that it became a retreat and transit area for international terrorist
networks. The failure of the Palestinian Territories to achieve statehood is known to
have strengthened Hamas. Removal of the distinction between public and private makes
6 Münkler, Herfried: op. cit, pp. 10-25.
7 See Kaldor, op.cit.
8 SIPRI Yearbook 2005. Armaments, Disarmament and International Security. Stockholm 2005.
9 See Weller, Christoph und Kirschner, Andrea: Zivile Konfl iktbearbeitung – Allheilmittel oder
Leerformel? Möglichkeiten und Grenzen eines vielversprechenden Konzepts. In: IPG 4/2005, p.
10-29.
382

for the emergence of civil war economies. 10 Erosion of state control capacities paves the
way for the emergence of the so-called “shadow globalisation,” transnational corruption
channels, human traffi cking, narcotics markets, small fi rearms trading – organised
crime. And fi nally: state failure is contagious. The symptoms of failure affect the entire
region and include refugee fl ows, arms proliferation, transnational crime and the collapse
of regional markets.
I.2 “Come on, let‘s build a state!”
To date there has been no standard defi nition of the term “state decay” (Staatszerfall).
The expression is indeed problematic. The parallel notion in English of failing suggests
an inevitability and linearity which are not borne out by reality, as demonstrated by a
number of “resurrected” states such as Uganda and Cambodia. In other cases (e.g. Lebanon),
the degree of the erosion has varied over the decades. State decay, therefore, has to
be defi ned as a process during which the institutions of certain states are incapable, or
only just capable, of fulfi lling fundamental state functions both within the country and
in its relations with other countries. These include the security function (guaranteeing
internal and external security), the welfare function (state services and transfers plus
an equitable allocation of resources) and the legitimacy and rule-of-law function (political
participation, judicial system, public administration). 11 The degree of erosion in the various
sectors can be measured using quantitative data such as that compiled in the Human
Development Index or the Freedom House Index. State decay is therefore not an unpredictable,
randomly occurring problem; state decay announces its advent long in advance.
A fundamental challenge for the future is thus to strengthen endangered states by means
of state-building using a set of intervention instruments appropriate to the type of country
concerned (“consolidated”, “weak”, “failing” or “failed”). 12 A “one-sizefi ts-all” approach
cannot lead to success. There is also a need to go beyond analysing the core functions of
the state as described above and broaden the remit to cover good governance matters as
well. How does a country acquire responsible and competent elites and a civil society which
is capable of dialogue and ready to engage in it?
I.3 The spectre of “ethnicity”
There is likewise a need to sharpen awareness of the often glaring contradictions
incorporated in the notion of nation-building, such as the “ethnicisation” of politics. In
contrast to essentialistic standpoints which proceed from the assumption that ethnicity
can be described as a type of natural category on the basis of objective criteria and
classifi es people on the basis of these criteria, effective peace-building needs to explore
the historical, social and political circumstances which are the causes of an exaggerated
10 See Ehrke, Michael: Zur politischen Ökonomie post-staatlicher Konfl ikte. Friedrich-Ebert-
Stiftung (Hrsg.), Bonn 2002 (Internationale Politikanalyse) and Andreas Hahn: Realitäten der Quasi-Staatlichkeit.
Zur politischen Ökonomie alternativer Herrschaftsordnungen. In: INEF Report
82/2006.
11 See Miliken, Jennifer and Krause, Keith: State Failure, State Collapse and State Reconstruction.
Oxford et al. 2003, and Schneckener, Ulrich (Hrsg.): States at Risk. Fragile Staaten als Sicherheits-
und Entwicklungsproblem. SWP-Studie. Berlin, November 2004. p. 43.
12 Schneckener, op. cit. , p. 17.
383

identifi cation with supposedly “ethnic” groups. The 1995 International Commission on
the Balkans called for programmes to be developed which defuse “ethnic confl icts and
the logics of exclusion”. In its understanding, the survival of a society depends on its
becoming “a civil society within which social cross-ties and solidarity structures can develop
as a counterweight to the ties of nationalism“. 13 In crisis regions elsewhere in the
world too, the assumption of a supposedly “natural community” based on ethnicity has
proved to be calamitous. 14 In the case of Iraq, the American policy of dividing the population
into Kurds, Sunni and Shia has led to a vicious circle which has awakened hopes of
secession. 15 One of the great challenges for peace-building will therefore be to promote
the establishment of strong (transnational) civil societies which are capable of advancing
something to countervail the notion of “ethnicity”. The term “ethnicity” must be shown
to be what it really is: an artifi cial assignment of identity for the purpose of collective
mobilisation which, in its totalitarian incarnation, serves as a concept for expulsion and
a “pure nation” (cf. Rwanda in 1994 or Srebrenica in 1995) 16 . Nation-building on the basis
of “ethnicity” is therefore not a priori peace-building and should also not be confused
with state-building. 17
384
I.4 New, old mediators: the rediscovery of political parties
The confl ict-resolving potential of political parties has long been underestimated;
that potential is assumed to rest instead with civil society. In many so-called “defective
democracies”, dysfunctional parties and defective party systems are indeed responsible
for holding back the consolidation process, yet their central function, namely to serve
as a transmission belt between political views on the one hand and their transposition
into state decisions on the other, continues to remain incumbent on them and cannot
be fulfi lled vicariously by civil society. 18 A party system’s degree of fragmentation has a
decisive infl uence on the consolidation of democracy and thus on the course of confl icts
within the society concerned. 19 It is the parties which are supposed to enable citizens
peacefully to participate in political life. Because of their sometimes decisive role in the
building up of political will, one of their pre-eminent functions is that of confl ict-solving
13 See Aspen Institute Berlin/Carnegie Endowment (Hrsg.): Der trügerische Frieden. Bericht
der Internationalen Balkan-Kommission. Hamburg 1997. p. 75.
14 See Balibar, Etienne: Die Nation-Form: Geschichte und Ideologie. In: Balibar, Etienne und
Wallerstein, Immanuel: Rasse, Klasse, Nation. Ambivalente Identitäten. 2. Aufl age, Hamburg 1998.
p. 111.
15 See. Wieland, Carsten: The Bankrupty of Humanism? Primordialism Dominates the Agenda
of International Politics. In: IPG. Friedrich-Ebert-Stiftung (Hrsg.). April 2005. p. 149. See also: Gärber,
Andrä: Der Nahe/Mittlere Osten – Die blockierte Region am Scheideweg, Reihe Kompass 2020
– Deutschland in den internationalen Beziehungen, Friedrich-Ebert-Stiftung, Berlin 2007, p. 15.
16 See Balibar, Etienne und Wallerstein, Immanuel: Rasse, Klasse, Nation. Ambivalente Iden-
titäten. Hamburg 1998.
17 See Jochen Hippler: Nation-Buidling. Ein Schlüsselkonzept für friedliche Konfl iktbearbei-
tung? Bonn 2004.
18 See Sartori, Giovanni: Parties and Party Systems. A Framework for Analysis, Cambridge
1976; Burnell, Peter: Building Better Democracies. Why Political Parties Matter. Westminster Foundation.
December 2004; Saxer, Marc: Parteiförderung als Instrument der Demokratieförderung.
Unv. Manuskript. Friedrich-Ebert-Stiftung. Berlin 2006.
19 Satori, p. 119 ff.

and mediation. Problems and countervailing forces, dysfunctional parties and defective
party systems should therefore not lead to the conclusion that parties are not (or are no
longer) an important element in leading a country towards consolidation. Peace-building
therefore can and must see itself as mandated to put parties in a position to carry out
their functions within a representative democracy. 20
I.5 “Development policy is peace policy”
Since the 11th September 2001 in particular, increasing importance is being attached
to the contributions of development policy within the context of confl ict prevention. The
self-refl ection in the sense of the do-no-harm principle 21 is greater here than in almost any
other fi eld of policy-making. In this connection, the current debate has arisen from the
experience that any measure will itself have an impact on the trajectory of the confl ict,
and sees development policy – again in the tradition of Willy Brandt – as peace policy. 22
The notion of “civil confl ict transformation and crisis prevention” has successfully found
its way into the development policy debate. Actors from civil society with their confl ictregulating
potential are seen as increasingly important. Within this context, civil peacebuilding
today incorporates all civil measures which before, during or after a violent
confl ict which are intended to bring about a peaceful transformation of that confl ict and
establish structures and mechanisms of non-violent confl ict transformation.
Peace requires the involvement of the entire society in the peace process and cannot
be imposed top-down. Moreover, external actors can at most provide support for such an
intra-societal process; they cannot themselves implement that process. For this reason,
it follows that it is of critical importance to support local peace activists and peace alliances,
the so-called peace constituencies. A broad consensus exists today acknowledging
that peace-building is a challenge which requires a coherent approach involving various
fi elds of policy-making. A decisive role, however, is played by development cooperation
activities. The causes of confl icts need to be recognised and eliminated, governmental
and non-governmental peace activists need to be supported within the framework of
societal and political programmes, structural stability needs to be created. Peace-building
has become a mainstreaming issue right across the development cooperation spectrum.
Of decisive importance in this connection is the processual nature of civil confl ict transformation.
The continuous and personal internalisation of experience with non-violent
confl ict transformation is a prerequisite for achieving sustainable peace. Short-termist,
rapid de-escalation strategies administered through external intervention deprive a constructive
confl ict culture of the humus from which it should obtain its nourishment. Civil
confl ict transformation is a highly demanding matter, but it also offers great potential
provided it is understood not as the one-off forestalling of an outbreak of violence but
instead as a long-term strategy of social development.
20 See Saxer, op. cit.
21 Do no harm is by far the most important rule for development coperation in crisis situations.
The principle aims to prevent the occur-rence of unintentional consequences fl owing from
humanitarian aid and development cooperation activities, for example the problem of possibly
provisioning of war-mongering elites. See Anderson, Mary B.: Do no harm: How Aid Can Support
Peace – or War. London 1999.
22 See Report of the North-South Commission: A Programme for Survival. (Brandt Report) of
12.12.1980.
385

386
II. NEW GERMAN APPROACHES TO POLICY-MAKING
In view of the challenges described above, the Federal Republic of Germany has also
been obliged to reformulate its foreign policy. Escalating intra- and extra-European confl
icts on the one hand and its reacquired full sovereignty on the other forced the reunited
Federal Republic to react to the changed circumstances within which it found itself operating.
It did this fi rst through its contribution to formulating the European Security
Strategy (ESS) and played a recognisable role in developing the “expanded notion of
security” enshrined therein. The ESS clearly highlights in several passages the EU’s overall
instrumentarium for prevention, such as EU trade, development and environment
policy, disarmament and arms control, plus security and defence policy actions such
as the largely EU-driven Stability Pact and the Stabilisation and Association Process for
Southeast Europe or the EU contribution towards the establishment of an International
Criminal Tribunal.
The commitment to the United Nations Charter makes it clear that military force is to
be used only as a last resort and only on the basis of Chapter VII (including Article 51).
Responsibility for peace and security rests – the ESS suggests – with the UN Security
Council. Moreover, the ESS contains a clear commitment to arms control – here again
clear evidence of German infl uence. 23
The experience gathered from “new wars”, and also from what has occurred nearer
home in the Balkans, has led in all EU Member States to recognition of the fact that
military measures alone are not suffi cient for establishing sustainable peace and democracy
in the countries concerned. As a result, like other countries too, Germany saw an
ever greater need for innovative foreign and security policy tools. The Agenda for Peace
formulated in 1992 by former UN Secretary-General Bhutros Bhutros Ghali had a strong
impact in this respect. It called fi rst and foremost for support to be given to structures
“which will tend to strengthen and solidify peace in order to avoid a relapse into [violent]
confl ict”. 24
A broad range of non-military instruments and methods was then developed by both
governmental and non-governmental actors. 25 In the security fi eld these include disarming
and demobilisation programmes and the reintegration of former combatants. The
year 1999 brought the founding in Germany of the Civil Peace Service (ZFD), still the
only organisation of its kind in Europe. The Civil Peace Service aims to promote the nonviolent
transformation of confl icts and contribute to post-confl ict reconciliation. ZFD
experts are currently working together with local civil society partner organisations in,
for example, Uganda and Sierra Leone, to help re-integrate displaced persons and child
soldiers. In the fi eld of public life, concepts have been drawn up for election support, law
and judicial reform, and criminal prosecution procedures. The political foundations have
played a signifi cant role among the community of non-governmental actors here. With
its campaign against electoral corruption, the Friedrich-Ebert-Stiftung has been able to
make valuable contributions to ensuring fair elections in former crisis regions in, for ex-
23 See also the SPD’s “Four-Point Plan for Nuclear Disarmament” of 26.6.2006.
24 Bhutros Ghali, Bhutros (1992): Agenda for Peace. Report of the Secretary-General Pursuant
to the Statement Adopted by the Summit Meeting of the Security Council on 31 January 1992. New
York: United Nations.
25 See Berghof: Handbook for Confl ict Transformation (http://www.berghof-handbook.net/
std_page.php?LANG=e&id=1) [15.11.2006]

ample, Benin, Kenya and Tanzania. A rule-of-law programme for Southeast Europe run
by the Konrad Adenauer Foundation was launched to promote the establishment and
sustainable consolidation of democratic states based on the rule of law in the countries
of this region. Special economic promotion programmes of the Kreditanstalt für Wiederaufbau
(KfW) supported the transition from a planned to a market economy in the
countries of the former Eastern Bloc. A primary aspiration informing this fi nancial cooperation
scheme was “to take account and counteract” confl ict-exacerbating factors “such
as socioeconomic inequalities, the lack of opportunity for political participation, fragile
state structures, inadequate civil society structures, political violence and repression and
competition for scarce resources”. 26 The debate on “business and confl ict” has resulted in
progress being made in the sensitive matter of investing in post-confl ict countries, for example
in the development of new codes of conduct for business transactions, restrictions
on trade in “confl ict commodities” (diamonds, oil), measures to combat the so-called
“resource scourge” and stricter money-laundering checks for the proceeds of corruption.
For example, the GTZ was mandated to address itself more actively to “private-sector
economic development in confl ict regions” and is exploring appropriate instruments and
formulating principles of best practice for private-sector economic promotion during periods
of reconstruction.
Special attention has been given to the development of programmes for the reintegration
of refugees, for coming to terms with past atrocities and for promoting independent
media. One factor identifi ed as helping to inhibit confl ict is the build-up of police forces
comprising offi cers from different communities; this was particularly evident in connection
with the repatriation and integration of former expellees from Bosnia-Herzegovina
and dealing with the social confl icts associated therewith.
II.1 Prevention as a call to battle
The concept of prevention was relatively slow to gain ground in connection with the
paradigm change in security policy thinking in Germany. The 1998 coalition agreement
between the SPD and the Greens was the fi rst offi cial text to document an ex-ante and
coherent coordination of policies in the fi elds of foreign affairs, security and development.
A major reason for this new departure was the experience of the 1990s, which had
entered the history books as the decade of the Balkan wars. As the wars in the former
Yugoslavia moved progressively from north to south, the international community found
itself powerless to stop their spread. What began in Slovenia and Croatia in 1991 was
repeated in Bosnia in 1992 and fi nally reached Serbia, Montenegro and Kosovo in 1999.
The classical politics of reaction to events and the traditional diplomatic mechanisms
of confl ict prevention and containment clearly seemed to be no longer effective. None
of the various actors and likewise none of the various instruments and strategies they
had deployed had proved to be adequate and effective in the practical matter of confl ict
prevention.
Realisation of the need for a different policy of prevention was also directly connected
with the disasters taking place in Somalia, Sierra Leone and Rwanda. The
shocking images transmitted into German family homes courtesy of modern communication
technology have been shown to have helped the concept of prevention become
26 See http://www.kfw-entwicklungsbank.de/DE_Home/Fachthemen/Konfl iktpr89/Friedensentwicklung_in_der_Finanziellen_Zusamme-narbeit.jsp
[01.11.2006]
387

more established in German minds. Moreover, when the bipolar system structure dissolved
in 1989/90, the time had evidently come for placing collective action at the
forefront of international politics. 27 And equally important were fi nancial constraints
which suggested that it would make sense to identify, contain and resolve confl icts before
they degenerate into violence. The notion of prevention is thus also clearly linked
to the legitimation needs of the foreign and development policy elites vis-à-vis an increasingly
critical public. Various statements of principle for various fi elds of German
policy-making thereafter tried to emphasise the European consensus on maximum coherence
in approaches to peace-building and the notion of prevention. Moreover, all
German federal governments since 1998 have done all they can to stress the merits of a
standard policy approach pursuing civil objectives. Such an approach is refl ected in the
Federal Government’s 2000 concept document on “Civilian crisis prevention, confl ict
resolution and post-confl ict peacebuilding“, the 2004 Action Plan on “Civilian crisis
prevention”, and in the document of the Federal Ministry for Economic Development
and Cooperation (BMZ) entitled “Cross-sectoral concept for crisis prevention, confl ict
transformation and peace building in Germany’s development cooperation activities”.
These new forms of coordination and strategy development were genuinely innovative
for Germany. For the fi rst time ever, governmental and non-governmental actors were
brought together and military and civil approaches combined. And 1 September 2001
saw the founding of “Arbeitsgemeinschaft Entwicklungspolitische Friedensarbeit”
(FriEnt), the Working Group on Development and Peace which brings together seven
governmental and non-governmental organisations engaged in development and peace
work. 28
388
II.2 Competition instead of coherence: the White Paper and civil crisis prevention
In the absence of a national security strategy, the 2006 “White Paper on Germany’s
Security Policy and the Future of the Armed Forces” is of outstanding importance in the
public debate on security issues. 29 It explains the security policy of the Federal Republic
of Germany within the given strategic framework conditions, its values, objectives and
interests. Remarkable here is the clear consensus within the Grand Coalition and thus
between the two main parties in Germany to the effect that “a far-sighted, sustainable,
and ultimately successful security policy […] has to coordinate and deploy, in coordinated
manner, both civil and military instruments.“ 30 The White Paper examines in detail
the consequences of intra-state and regional confl icts, the decaying of states and the frequently
concomitant forfeiture of the state’s monopoly on the use of force. It states that
“the strategies successfully tried and tested in the past for warding off external threats
– such as deterrence – […] are not suffi cient for use against the new, asymmetric [...]
threats.“ For that reason there is a need for “preventive, effective and coherent cooperation
within both the national and international framework, including effective actions to
27 See Lepgold, Joseph und Weiss, Thomas G.: Collective Confl ict Management and Changing
World Politics, New York 1988.
28 See www.frient.de [11.10.2006]
29 Bundesministerium der Verteidigung (Hrsg.): Weißbuch 2006 zur Sicherheitspolitik Deutschlands
und zur Zukunft der Bundeswehr.Berlin, Oktober 2006.
30 Ibid., p. 3.

tackle the causes.“ 31 Providing for security is therefore best achieved by means of early
alert and must involve the “entire security policy instrumentarium”. “This includes diplomatic,
economic, development, police and military means, and if required, also armed
intervention.“ 32
However, apart from quotes from the Action Plan on Civilian Crisis Prevention,
Confl ict Resolution and Post-Confl ict Peacebuilding, 33 the White Paper contains no references
to instruments, methods, institutions or organisations of civil crisis prevention
and confl ict transformation. The scant attention given in the public debate in Germany
to this civil-society-based approach is partly attributable to this omission. The White
Paper does not question the success of civil society actors in solving confl ict, but surprisingly
it names the German armed forces as forming part of such a civil-societybased
approach. 34 Confl ict transformation – a fi eld in which foreign and development
policy and likewise numerous non-governmental actors such as the churches and political
foundations have accumulated decades-worth of expertise and experience – is
envisaged in the White Paper as being incumbent on, inter alia, the German armed
forces. The authors of the White Paper want to eliminate (societally necessary, normal)
confl ict as such altogether: “international confl ict avoidance [sic!] and crisis management,
including the struggle against international terrorism are their [the armed forces,
M.A.] more likely tasks in the foreseeable future. [...] Interventions to avoid confl ict
and manage crises do not differ in terms of intensity and complexity from interventions
to defend alliance partners.“ 35 The notion of prevention thus does not remain
merely on the abstract and declamatory level. And any possible considerations of shifting
funding from the cost-intensive military sector to the less costly non-military sector
are thus deprived of arguments.
Just where the German armed forces could obtain the expertise for such future preventive
work within the context of failing or weak states remains unclear. The document
provides no information on the possible civilising potential of the armed forces or the
possible recruitment of external experts with the appropriate skills -in fi elds such as constitutional
reform, reform of rule-of-law structure, preparing for elections, promotion of
democracy, promotion of civil society and media. An element of the Red-Green heritage
is still evident in the White Paper, namely where it acknowledges that the more exacting
“requirements […] call for appropriate funding within the framework of the available
budget, not only for the armed forces but also for all other governmental agencies concerned
[...] with safeguarding peace.“ 36
If the irrefutable conclusion here is that the circumstances of the new century call for
preventive politics, for the broadening of the notion of security to include non-military
categories, for sustainable state-building and for civil confl ict transformation, it is interesting
to subject Germany’s current foreign policy to scrutiny – specifi cally its security
policy thinking, planning and action in matters of peace-building. Do the current priorities
withstand such scrutiny in the scenarios of the world in 2020?
31 31] Ibid., pp. 16-17.
32 Ibid., p. 24.
33 Ibid., p. 26.
34 „The term ‚civil crisis prevention‘ should be understood not as distinct from military crisis
prevention, but instead as including the latter.“ Ibid., p. 26.
35 Ibid., p. 64.
36 Ibid., p. 142.
389

390
III. THE YEAR 2020: SCENARIOS
Numerous studies on state decay and new wars repeatedly cite ten factors which
have a substantial infl uence on the probability that a confl ict will turn violent. 37 These include
(1) the competence of the country’s elites, (2) the sense of responsibility felt by the
country’s elites, (3) the extent to which the rule of law obtains, (4) the degree of equity
in the distribution of resources, (5) the strength of the local economy, (6) the stability of
the regional environment, (7) the degree of democratic control of the security sector, (8)
the functionality of the political parties, (9) the dialogue capability of civil society and the
media and (10) justice in the allocation of resources (access to welfare benefi ts and education).
The following two scenarios were selected from a large number of possible courses
of events and on the basis of special attention to the factors “competence and sense of
responsibility of the country’s elites“ and “justice in the allocation of resources“ and their
impact on all other factors in the overall development process.
III.1 Scenario: The boomerang
For the fi rst time in years, the 2020 European Easter marches are again marred by
violent clashes between the police and demonstrators. The German public is polarised
in a manner reminiscent of the NATO twin-track debates of the 1980s. In view of the
ever more frequent arrival of servicemen and women’s corpses from war zones and
the increasingly diminished quality of life resulting from terrorist threats in Germany,
the German public has reached the limits of its tolerance. According to many experts,
however, the deeper reason for the clashes is the conceptual weakness of national and
European security policy. There is still no national security strategy and, apart from
the armed forces, virtually no other actors are invited to contribute to deliberations
on strategic matters. The Federal Ministry of Economic Cooperation and Development
(BMZ) is fi nding it increasingly diffi cult to justify its activities. Too many tax-funded
development projects have literally been set ablaze by wars. In many states in 2020, access
to land, water, mineral resources and energy is governed by arbitrary decision and
the use of force. The “South” is described in the “North” as nothing more than an array
of black holes and, offering fertile ground for terrorism, arms-traffi cking, drug-traffi
cking and criminal gangs, as a danger to Europe. This is the perspective from which
security strategies are devised; the interventions take place in situ. The world in 2020
is encircled by a crisis belt.
In the regional Bermuda Triangle involving Afghanistan, Iran and Turkmenistan, instability
and coercive structures have become established at a high level. The Afghan
government in Kabul forms an enclave within its own territory. The entire region is governed
by innumerable autonomous warlords who purchase the loyalty of autonomous
militia. Several attempts by the international community to contain poppy cultivation
in the region have failed. Of the over 1,100 Afghan and international non-governmental
organisations which were operating in Afghanistan alone in 2005, only just over 200
have remained. Clashes over the control of roads, heroin crops, water and mining rights,
modern slave-trading and the predatory exploitation of natural resources are the factors
37 See the Guidelines Helping to Prevent Confl ict devised within the Development Assistance
Committee (DAC) of the Organisation for Economic Co-operation and Development (OECD), or
Schneckener, op. cit.

which shape the everyday lives of the people. The situation is extremely complex and
unpredictable because it is made up of various regional confl icts superimposed on each
other. Socioeconomic conditions have deteriorated dramatically. Permanently being at
war has devastated the infrastructure. Afghanistan alone has lost over three million lives
and reports having over twenty million anti-personnel mines on its territory, an illiteracy
rate of over 70 per cent and up to eight million people who have fl ed the country for
Pakistan and Iran. At the same time, the region between Herat and Mashhad has developed
into a hub for international heroin smuggling. Some groups are receiving additional
military aid from Pakistan, Iran and Russia to defend their interests in Afghanistan and
Turkmenistan. The USA is likewise involved. Turkmenistan in particular has acquired
strategic importance as a deployment base for a military operation against Tehran.
In many countries of the South, justice and the security sector serve the interests
of the elites. There is virtually no control of the executive. The press in many of these
countries has been brought into line. Corruption and clientelism have replaced the rule
of law. The political situation in Southeast Europe has hardly improved. 38 The countries
of the region have indeed endorsed the principles of democracy and continue to aim for
EU membership, but their efforts to reform and modernise the public administration
are being pursued with ever less vigour. And the advances once made in protecting the
rights of minorities have also unravelled. In 2018, Serbia and Montenegro indulged in
more violent attacks on internal expellees from Kosovo, this in the wake of an unsuccessful
application for EU membership, an economic crisis and resource shortages. The
number of unoffi cial settlements established by these expellees rose from 586 in 2005
to 701 in 2020, though the older camps now look more like permanent settlements like
those in the Gaza Strip. And while in Serbia politicians still regularly exert infl uence on
the judiciary and the media, in Kosovo organised crime and corruption form one of the
main pillars shoring up the economy.
A climate like this has an impact on economic development, to the effect that hardly
any state is simultaneously in crisis and integrated into the world market. Falling tax
revenues and a persistent disparity between urban and rural areas prevent a state from
being able to fulfi l its social welfare function. Unemployment, low incomes and poverty
fi nally lead to the accumulation of a huge potential for violence among young men. That
which started as a student demonstration on the campus of Cairo University in the spring
of 2016 spread to become a youth revolt infl aming all of Egypt and ended in a bloodbath
perpetrated by the overstretched forces of law and order. The trajectories of many of the
young suicide bombers who have long been active in European cities can be traced back
to Egypt, Pakistan and the Autonomous Palestinian Territories.
In many cases it was the so-called trigger factors which allowed societal confl ict to degenerate
into war: in West Africa in 2015 it was the effect of droughts and other natural
disasters which occurred at the same time as incoming refugee fl ows swelled. Too many
people had failed in their attempts to fl ee to the EU. In Belarus, decades of suppressing
the opposition in conjunction with a rapid deterioration in the economic situation resulted
in 2017 in riots akin to civil war. The clashes in Colombia which started as domestic
violence spread to other parts of Latin America and became a regional confl ict which
escalated fast after the USA intervened. A very weak state, no state monopoly on the use
38 See Britta Joerißen, The Balkans – On War, Peace and Europe, January 2007, Kompass 2020
– Germany in international relations – Aims, instruments, prospects, Friedrich-Ebert-Stiftung, Berlin
2007.
391

of force in remote regions and, more particularly, easy access to small fi rearms had for
years been preparing the ground for the rise of non-state perpetrators of violence.
Although Germany does not see itself as a cause of the course of events in world politics
which led to this 2020 scenario, the debate on failed concepts for foreign and security
policy is becoming more heated. How was it that events took the course they did?
Whereas all German federal governments since 1998 acknowledged the principles
of an enlarged notion of security, a lack of political will meant that attempts to implement
them in practice had failed. The 6th independent report of an expert commission
on the implementation of the action plan adopted in April 2016 laments “existing ineffi
ciencies, an ongoing lack of coherence and the lack of any appearance of civil-military
cooperation“. Whereas deployments of the German armed forces were approved under
broad-based public scrutiny and interest, civil actors struggled to get their mandates endorsed.
Assets such as manpower, funding and the scheduled timing of military and civil
interventions differed to an extent which was in crass confl ict with the terms of the action
plan. Confl ict demarcation lines existing between the various ministries in Germany
were transported into the countries in which the deployments were taking place, with
the result that disputes over intervention approaches and target groups were conducted
locally at the intervention sites, thus undermining the legitimacy of both the troops deployed
there and the civil-society specialists working alongside them.
A series of intensive debates on the priorities for Germany’s foreign and development
policy conducted in the German Parliament in 2008 and 2009 had failed to lead to
a concentration of minds on core issues. Domestic political constraints and the apparent
unattractiveness of civil-society approaches compared with the popular appeal of media
images of “Germany’s armed forces in action” stopped the approval of an increase in the
budget appropriation for confl ict transformation. The work with decision-making elites,
which the UN had pointed out as being particularly important, was carried on by political
foundations and numerous non-governmental organisations, but a lack of resources
meant that the impact of their activities remained well below what it might have been.
Nor was there any pooling of resources at EU level. Instead, priority was given to prestigious
national programmes. The lack of a common vision also affected the EU’s partner
countries in their perception of the EU. A lack of consensus, the prevalence of competition
and the pursuit of vested interests within the EU counteracted any possibility of
Germany or the EU setting an example and caused policy-makers in Africa, Asia and the
Middle East to refrain from pursuing similar projects.
The growing threat of terrorism in Germany since then has led to a business boom for
private security companies. At the same time, more and more voices are calling for the
withdrawal of the German armed forces from all interventions abroad and the reallocation
of budget appropriations. The Federal Government fi nds itself under increasing pressure.
Whereas at the turn of the millennium in 1999/2000 the possibility of a crisis belt emerging
in the South had been seen as the worst case scenario, the politicians of 2020 are irritated
to fi nd that the crisis in the South has now led to a domestic crisis in Germany.
392
III.2 Scenario: Give peace a chance!
Despite the many setbacks experienced in the various countries in which Germany
has intervened, by 2020 the Federal Republic of Germany has emerged as an active
advocate of a policy of “preventive diplomacy”. Germany is able to make a substantial

contribution to global peace-building by including civil crisis prevention and confl ict
transformation as an integral part of its “networked” foreign policy. It is true that violent
confl icts are still raging in many partner countries, but in many cases such confl icts have
been successfully transformed by strengthening the civil component of peace-building
activities. The trend towards state failure was also successfully halted in numerous countries
and in some others it was even reversed.
Sudan, which for many years was considered to be a failing state, had been stabilised
by means of a massive deployment of blue beret forces in conjunction with the targeted
intensifi cation of the national dialogue. The pressure of international sanctions caused
the government to start extraditing war criminals to the International Criminal Court
in 2009. Sudan’s relations with the international community improved, and many international
organisations returned to the country to engage – with the government in
Khartoum in full knowledge of the fact – primarily in confl ict transformation activities.
Germany’s development policy provided for measures to stabilise the living conditions
of refugees and facilitate their reintegration into Sudanese society. DED, GTZ and the
German political foundations set up regional offi ces in Juba and are working to resettle
and reintegrate former expellees. Particular importance is attached in this work to the
use of confl ict mediation mechanisms. Severely affected groups are being taken care of
by means of a concept for community-based peace-building. Some 200,000 Sudanese
refugees who had fl ed to Uganda and 80,000 further refugees from Kenya have been reintegrated
by the year 2020, and this achievement has signifi cantly reduced the potential
for the use of force in the entire region.
Elections and the 2011 referendum on national unity took place without disturbance.
The new government proved to be stable and workable as both governing parties – SPLM
and NDC – derive their legitimacy from fair and free elections held in 2013 and 2018 and
monitored by the international community with a massive observer presence. A sensible
election law and programmes for monitoring the conduct of the elections had guaranteed
that they were fair. The political back-up resulted in all factions of the decision-making
elite being prepared to be more pragmatic and willing to cooperate. The northern regions
of Sudan were better integrated into the state in both political and economic terms, with
the result that the Darfur confl ict de-escalated and other regional confl icts were prevented
from escalating. ZFD experts from Germany worked together with local civil society
partner organisations on reintegration measures for former combatants. Unlike in other
countries, however, Sudan has a massive presence of UN peace-keepers. It was only with
the targeted intensifi cation of the national dialogue by the civil international actors that
a sustainable peace began to take shape.
By 2020, other states which, at the beginning of the new millennium, seemed to be at
risk of failure are for the fi rst time able to present a stable public budget, initial indicators
of a strengthening of the formal sector, and evidence of slowly onsetting economic
growth. This is particularly true of Jordan and Yemen, both countries being rent economies
vulnerable to crisis and having suffered from the failure of Iraq, increasingly scarce
resources, structural imbalances and growing unemployment. Increasing social inequality
in both countries led to terrorist attacks on the regime around 2010 and an extremely
tense security alert situation which not infrequently was accompanied by violations of
human rights.
After stabilising public security and introducing reforms in the security sector, the
governments in both countries were careful to ensure the success of further measures
393

to enhance the legitimacy of state institutions. Yemen introduced reforms in the tax,
customs, fi scal and budget administrations which raised government revenue and created
greater effi ciency and transparency in public spending. Jordan successfully concentrated
on introducing reforms in the health and education sectors. Better educated and
trained, the Jordanian population then successfully demanded better performance from
its government in terms of applying the rule of law. The Federal Republic of Germany
was a strong supporter of the corresponding standard-raising programmes. Progress was
made in both countries in combating mismanagement and the abuse of offi ce by means
of political education schemes for adults and long-term consultancy measures run by
Germany’s Ministry of Economic Affairs. The resources freed up from the closing off of
corruption channels could be redirected towards health and education, a measure which
restored the citizens’ faith in and loyalty to their state system. Yemen also drafted and
introduced a “Code of good administrative practice”. The cross-sectoral approach by German
foreign and development policy had paid dividends.
On Germany’s insistence, support within the framework of the European Neighbourhood
Policy and the Action Plan for Jordan was no longer made conditional on Jordan’s
implementing economic reforms but instead on government action to ensure good governance.
Jordan in 2020 is on the road to consolidation and has recently launched a
democratic reform process to transform the country into a constitutional monarchy.
In 2020, Germany’s foreign and development policy is renowned as being a successful
peace policy. How did that come about?
Of decisive importance were the policy decisions taken in the fi rst decade of the new
millennium. The process of European integration had made great leaps forward in terms
of foreign and security policy. A newly set up EU Ministry of Foreign Affairs henceforth
made it possible to ensure coherence in European foreign policy. This did not make action
by the individual member states obsolete, but more importantly it released synergies
and made for better use of existing capacities. For example, German politics began to
concentrate on dealing with structural factors in partner countries which were at risk of
state failure and war. The establishment of a European intervention force lent this policy
additional credibility and clout. A 15,000-strong Human Security Response Force, a combined
civil and military intervention unit accountable to the EU Ministry of Foreign Affairs,
is now operating under the aegis of the Civil-Military Planning Centre in Brussels.
This Human Security Response Force is not a substitute for the German armed forces
in matters of foreign intervention; on the contrary it is dependent on the contributions
made by such forces. The now successfully completed transformation of the German
armed forces enables the Federal Republic of Germany to be a credible player within the
framework of the Alliance. Since the 11th September 2001, however, there has been no
occasion when the NATO defence alliance had to be invoked.
The international debates on effective state-building measures also had an impact
on strategy considerations in Germany. Since the intensive series of debates in the German
parliament in 2008 and 2009, German initiatives within the CFSP framework have
concentrated on strengthening the local civil society, the building up of democratic systems
and reforms in the rule of law and security sector. Underlying this prioritisation is
the recognition that in many confl ict analyses the factors “elites within a society” and
“equitable resource distribution” are found to have a particularly strong impact on the
trajectory of a confl ict. The EU Member States are pooling their resources and making
394

more extensive use of the respective national organisations, organisations which have a
comparative advantage over their counterparts from other countries.
Through numerous non-governmental organisations specialising in adult education,
German experts have long been focusing more on the initial and continuing training of
elites. The decision-makers of a country and likewise the representatives of civil society
there are to be trained to higher standards and, more importantly, encouraged to sharpen
their sense of responsibility. This is accomplished by means of aid for democratisation,
the promotion of political parties, combating corruption, the holding and monitoring of
elections, judicial reform, the promotion of human rights and gender democracy, encouragement
for press freedom, constitutional reform, administrative reform, more robust
decision-making structures at local or municipal level and, not least, culture and arts
projects.
In terms of the second priority area in Germany’s foreign and development policy,
the aim here is to introduce / re-instate within a state its social welfare function. This is
predominantly a matter of ensuring more equal opportunities and an equitable distribution
of the country’s resources. By 2020, Germany’s development cooperation activities
have acquired a reputation for quality in terms of measures to improve the basic
welfare provision for the population, to strengthen education and health care institutions
and to promote rural development. An evidence-based improvement in the distribution
of state transfers has been achieved as a result of German development aid. The
merits of concentrating efforts on the factors discussed above were self-evident. In the
countries in which German development cooperation activities were concentrated, by
2020 it could be observed that positive results with these factors had in turn had a positive
impact on other factors which typically trigger the outbreak of violence. By focusing
on work with decision-making elites it had been possible to achieve a sustainable
overall impact. In the overwhelming majority of cases, the deliberate policy change
initiated by a group of decision-makers in the countries concerned had injected the decisive
impetus needed to change the course of history. Their more responsible attitude
to their ‘offi cial responsibility’ was clearly noticeable and once again underscored the
signifi cance of political education.
A similar effect, incidentally, could be observed in German politics. On the strength
of a national security strategy adopted in 2009, the confl ict lines within the ministerial
bureaucracy were removed and capacities pooled in joint regional budgets and inter-ministerial
crisis management teams. Though many had fearfully predicted more ineffective
bureaucracy, the reform brought better liaison and a more coordinated approach. Since
2010 the armed forces, the liaison unit for the International Police Task Force, the Centre
for International Peace Missions and non-governmental organisations have been operating
joint planning and recruitment mechanisms without having to forgo their respective
independent status. Joint analysis, planning, implementation and evaluation on the basis
of country-specifi c concepts have resulted in a holistic approach to confl icts, their causes
and the possible intervention tools to defuse them. By surmounting their conventional
reluctance to communicate, civil and military organisations were better able to work together,
and this in turn led to greater mutual respect and the acceptance of differences
in approach. German servicemen and women and civil peace experts are now self-confi
dently working together on international missions. As a result, the level of respect and
legitimacy accorded to them by the populations with whom they are working is high. In
international expert circles, Germany is referred to as an “identifi cation force”, i.e. a force
395

which wants the people in the countries of deployment to identify with its objectives and
values instead of assuming that the troops have a hidden agenda.
Not least because of their lower cost, non-military confl ict resolution models have
become much more popular with the German public, and this is refl ected by the increased
demand for positive reports from prevention projects, for example in coverage
on German television channels. Where they have proved still to be indispensable, German
forces’ missions abroad are readily accepted by the German population. The fact
that German soldiers have been among those who lost their lives on such missions is a
subject discussed with critical attention and respect. The resistance within Germany to
an alleged remilitarisation of German foreign policy has diminished considerably.
396
IV. OPTIONS FOR ACTION
IV.1 Development of a national security strategy
The controversies which accompanied the 2006 “White Paper on Germany’s Security
Policy and the Future of the German Armed Forces” have once again highlighted the
urgent need for a national security strategy. In the opinion of many of those involved in
civil confl ict transformation, not enough use has yet been made of the opportunities to
formulate a new, future-proof understanding of security and peace policy and upgrade
the status of non-military measures for crisis prevention and confl ict resolution. The
“concept of collective security” invoked by Kofi Annan still needs a broader support base
in Germany. Simply defending one’s own country against threats is not suffi ciently farsighted
as the guiding principle to inform security policy. What is required is a comprehensive,
holistic approach which is appropriate to the circumstances of the interdependent
world of the 21st century. Ideally, a national security strategy could be the culmination
of a broad-based public debate on Germany’s future responsibilities, the contributors to
which would be politicians, civil society organisations, security experts, representatives
of the armed forces and also people from the South. Responsibility for coordinating the
debate should rest with the Federal Chancellery, not the Ministry of Defence.
IV.2 From the ultima ratio to the prima ratio: primacy for civil confl ict transformation
One conclusion from the scenarios developed here is that German foreign and security
policy in the coming years must try to make use of the entire range of instruments
available for civil confl ict transformation. In addition, there is a need to elevate crisis
prevention to a prima ratio before the use of military force is seized upon as the ultima
ratio. Overestimation of the merits of military intervention as a means of dealing with
confl ict has hitherto often undermined the quest for political solutions (an example here
is the UNIFIL mission in Lebanon of 2006). Although the use of military force is not
able to bring about a sustainable and lasting peace, since the end of the 1990s it has
been possible to observe a trend in Germany whereby the increase in the scale of the
country’s military interventions abroad is accompanied by growing acceptance of such
interventions as a political tool - and this despite the fact that the experience gained in
the Balkans, Iraq and Afghanistan would suggest that the opposite might be the more
reasonable reaction.

IV.3 Civil-military cooperation
In its security strategy, the European Union has recognised the new threats of the 21st
century but has not yet developed adequate capabilities to respond to these threats. The
traditional approaches to territorial defence are no longer robust enough. The EU – and
with it Germany too – is therefore obliged, in the longer term, to gear its foreign policy
not only to states but also to individuals. This obligation not only derives from history
but also exists in the EU’s own interests. The Human Security Doctrine for Europe is the
fi rst step in the right direction. The Human Security Response Force mentioned therein,
which represents a kind of hybrid between classical peace-keeping and military intervention,
is an innovative approach, but it leaves a lot of questions unanswered. Civilian
measures must not run the risk of being dominated by security considerations. Development
cooperation and humanitarian aid must not be perceived as purely strategic options
in the wake of military interventions. What is required is a type of cooperation which,
building on joint training modules and coordinated strategies, leads to mutual recognition
and respect. In civil confl ict transformation to date, the best protection available to
the actors has been their neutrality and independence and access to the local population.
Even though it might sound paradoxical, this does not mean strict demarcation lines
between military activities, humanitarian aid and civil confl ict transformation. On the
contrary, the more openly military and non-military actors work together in crisis regions,
the more credibility they will have in the eyes of the local population. People in the
countries of the South do not – or no longer – assume that the work of non-governmental
organisations is entirely selfl ess.
IV.4 Inter-ministry concepts and strategies
Stabilising and consolidating weak and failed states is not something that can be
accomplished by any single ministry. In Germany there is an urgent need for inter-ministry
concepts, strategies and criteria for state-building which help remove the confl ict
lines between ministries. The concept drawn up by the Federal Ministry for Economic
Cooperation and Development entitled “Development-oriented transformation in fragile
states with poor governance” has outlined some provisional criteria, strategies and areas
for action. The German experience in dealing with fragile states should also be fed into
the EU debate on further developing the ESS.
Regarding consultation and coordination, there is still a lot more potential to be
tapped for synergies. The setting up of inter-ministerial circles and an advisory panel
marked the fi rst institutional conclusions to be acted on with regard to the infrastructure
of crisis prevention in Germany. Enhanced manpower and fi nancial resources – compared
with those for military infrastructure – would be a positive pointer for the future.
IV.5 Financing instruments
Although the German armed forces cannot make any substantive contribution to
dealing with the causes of confl ict, it receives many more times the amount of taxpayers’
money in funding than those actors whose approach to crisis prevention and
confl ict transformation is via the origins and causes of the problems. The budget of the
Federal Ministry of Economic Cooperation and Development (sub-budget 23) for 2004
amounted to € 3.8 billion and was thus about one sixth the size of the budget of the
397

Federal Ministry of Defence. While BMZ funding for the Civil Peace Service and the
Foreign Offi ce’s budget item for peace-keeping measures together amounted to about
€ 30 million, the 2004 federal budget allocated a total of € 24 billion (sub-budget 14) for
armed forces operations alone. The German Foundation for Peace Research (DSF) had
to make do with a capital stock of some € 25 million, whereas the Ministry of Defence
appropriation for research alone amounted to € 952 million. These fi gures show clearly
that success in crisis prevention work calls for a redistribution of funding. Synergies
could be tapped in this connection by setting up joint fi nancing instruments to dovetail
the policies of the foreign affairs, development cooperation and defence ministries
(thematic or regional funds).
Moreover, the funds spent on civil crisis prevention should at last be identifi ed as
such in the federal budget and presented in the Federal Government’s report on the
Action Plan in a manner which shows whether civil crisis prevention is actually being
improved, in both quantitative and qualitative terms, along the lines envisaged by the
Action Plan. An additional recommendation for this area of activity to promote gender
mainstreaming there is separate gender budgeting.
398
IV.6 Governmental, non-governmental and pan-European cooperation
Experience shows that international efforts to handle and transform confl icts are
most likely to succeed if they entail a range of concepts and instruments deployed in
coordinated fashion within the framework of multilateral cooperation involving both
governmental and non-governmental actors. Germany, with its political foundations and
a large number of non-governmental organisations engaged in development work, has
a series of comparative advantages over many other countries in this respect. In future,
Germany could concentrate its efforts on areas of activity where it has already gained
considerable experience. Instead of tackling all the structural causes of a confl ict in a
given country, it would make sense to select a few – in consultation with other European
countries – and concentrate on these. Germany has accumulated a considerable body of
expertise in the fi eld of promoting democratisation, a fi eld which covers programmes to
strengthen political parties, civil society, the rule of law, the media, development work
with decision-making elites, democratisation aid, anti-corruption measures, ethics in administrative
practice, the holding and monitoring of elections, judicial reform, promotion
of human rights and gender democracy, strengthening press freedom, constitutional
reform, administrative reform, strengthening local decision-making structures, and also
cultural and arts projects. A second pillar of German foreign and development policy
could and indeed must help establish / re-instate a country’s social welfare function. Unless
it distributes its resources equitably, a state will forfeit its raison d’être: acceptance
by its population and identifi cation between society and state.
IV.7 Prevention lobby
Not only in terms of resource endowment but also with respect to media coverage
could a better balance be struck in Germany between the centralised military apparatus
on the one hand and the decentralised structures of crisis prevention on the other.
The current power disparity exerts a virtually automatic push in favour of dealing with
crises by military means. Even the Federal Government, in its “First Report on the

Implementation of the Action Plan”, notes, inter alia, that crisis prevention still has
no strong lobby. So it is not just the Federal Government but also the German media
and German civil society as a whole which still have work to do. What is required here
is not only de-escalation journalism from crisis regions but also coverage of success
stories, this being all the more so because crisis prevention leans more towards the
quiet diplomacy side and has no need for what O. Hennig termed “large-scale media
spectacle”.
On the author: Michèle Auga is mainstreaming offi cer for civil crisis prevention and confl ict transformation
within the Division for International Cooperation of the Friedrich-Ebert-Stiftung.
399

Germany and Global Politics

TOO MANY OR TOO FEW: DEMOGRAPHIC GROWTH
AND INTERNATIONAL MIGRATION
Ernst Hillebrand
This article authored by Ernst Hillebrand was originally published by Friedrich-Ebert-
Stiftung, Department for Development Policy, Berlin, 2007
ABSTRACT
The world population is set to grow by 17% by 2020, from 6.5 billion (2005) to around
7.56 billion. By far the largest part of this growth will take place in the developing countries,
with the sharpest increases taking place in the least developed countries. The
LLDC‘s share of the world population will rise from 11% to 14% by 2020, that of the currently
developing countries overall from 81.3% to 83.6%.
At the same time, the number of migrants worldwide will continue to increase. From
1960 to 2005, the number of migrants rose from a total of 75 million to currently around
191 million. Until 2050, an additional net fi gure of around 100 million people will migrate
from the third to the fi rst world. The factors that have triggered migratory movements in
the past, particularly income differentials between regions, will also apply in the future.
It is not expected that the gap in income between the industrialised countries and the
developing world will close in the foreseeable future; rather there are many indicators
that this gap will widen even further (with the exception of China).
Within Europe, Germany – which is currently home to some 31% of the European
population of foreign extraction (France14%, UK 12%, Italy 9%) – will continue to be the
main destination for migrants. Calculations of the German Federal Statistical Offi ce give
annual net legal immigration scenarios of 200,000 to 300,000 during the period until
2020. Germany will be the second largest recipient country of legal migrants after the US
and will continue to be of particular appeal to immigrants from Europe’s non-EU countries
and Eastern Europe, as well as having a particularly high infl ux from Turkey.
Levels of illegal migration will continue to increase worldwide, with human traffi cking
and people smuggling already accounting for the third largest sector of global organised
crime.
The two 2020 scenarios are based on different developments in the two regions of particular
importance for migratory movements to Europe – Eastern Europe and the “arc of crisis”
in the Middle and Near East. Depending on political and economic developments in these
regions, immigration to Western Europe can take on very different forms in the future.
Viewed realistically, the chances of German or European policy having any impact on
the decisive factors triggering migration – population growth and differences in income
in a globalised world– are very small. Action is therefore best concentrated on controlling
and managing migration. Given the unabated immigration pressure, particularly from
the developing countries, the EU will have to develop a common policy of controlled immigration
of primarily well-educated, young people and of effective protection of external
borders against unwanted immigration. An effi cient policy of integration will remain
decisive and key to the management of any further immigration.
403

At the same time, to solve Germany’s demographic problems, an active population
and family policy promoting parenthood is required which will raise the birth rate to the
level of those Western European countries that are having more success in this area.
404
I. DEMOGRAPHY AND MIGRATION: GLOBAL TRENDS
I.1 The growth of the world population to 2020 and beyond
According to UN calculations, the world population will grow by 17% by 2020, from
6.5 billion (2005) to around 7.56 billion. Most of this growth will take place in the developing
countries and, here again, mainly in the least developed countries. The population
of the industrialised countries will, by contrast, stagnate, since the birth rate in most of
these countries is below the population replacement rate.
Table 1: Growth of world population by 2020
Population (in thousands)
Year 2005 2010 2015 2020
World 6 464 750 6 842 923 7 219 431 7 577 889
Africa 905 936 1 006 905 1 115 358 1 228 276
Asia 3 905 415 4 130 383 4 351 001 4 553 791
Europe 728 389 725 786 721 111 714 959
Latin America & the Caribbean 561 346 598 771 634 104 666 955
North Amerika 330 608 346 062 360 905 375 000
Oceania 33 056 35 017 36 952 38 909
More developed regions 1 211 265 1 225 678 1 236 561 1 224 413
Less developed regions 5 253 484 5 617 246 5 982 871 6 333 475
Least developed regions 759 389 852 025 951 610 1 057 086
Correspondingly, the share of the world population of today‘s developing countries
will rise from 81.3% to 83.6% by 2020 and that of the least developed countries (LLDC)
from 11% to 14%. However, also in the currently developing countries – particularly in
China – population growth will slow down in the long term.
The HIV pandemic will have a signifi cant impact on demographic growth only in the
southern part of the African continent. Life expectancy has been falling there since the
mid-1990s and will continue to fall to an average life expectancy of 43 by the middle of
the next decade. Outside of this region, the very high birth rate in the LLDC will, however,
broadly offset the negative impact of this increased mortality.
UN calculations assume a continuation of the global trend towards urbanisation: in
2020, around 56% of the world population will live in cities, with only 44% still in rural areas.
The highest level of urbanisation will be reached in North America, closely followed
by Latin America. Levels of urbanisation in the hitherto most rural continent, Africa, will
rise from today’s 40% to around 48%.
In the long term – by 2050 – the UN expects the world population to grow to some 9.1
billion. Today’s developing countries will account for 95% of this increase. Looking at in-

dividual countries, the following ones will make the largest absolute contribution to the
growth in the world population: India, Pakistan, Nigeria, Congo, Bangladesh, Uganda,
US, Ethiopia, and China (in declining order). The countries that will experience the largest
relative population increase by 2050 all number among the least developed countries.
All but two of them are situated in Africa: Afghanistan, Burkina Faso, Burundi, Chad,
Congo, Congo-Brazzaville, East Timor, Guinea-Bissau, Liberia, Mali, Niger and Uganda. 1
According to these UN-calculations, the population of today’s industrialised countries
will only have fallen slightly by 2050, with this relative stagnation increasingly being the
result of immigration. Stagnation of population levels is however by no means restricted
to the developed nations. Birth rates are not only already below the population replacement
rate in almost all industrialised countries, but also in 23 developing countries, which
together account for a quarter of the current world population. This group includes China,
whose birth rate in recent years was below that of some industrialised countries.
I.2 International migration: Current situation and general trends to 2020
Worldwide, the number of migrants will continue to rise. It is presumed that this
increase will take place at an even faster rate than in the last 50 years. In the period from
1960 to 2005, the number of international migrants rose from 75 million to 191 million,
an increase of 121 million people in 45 years. 2
Table 2: International Migration
Number of international migrants in millions % of population Distribution %
Year 1960 1970 1980 1990 2000 1960 2000 1960 2000
World 75,9 81,5 99,8 154,0 175,0 2,5 2,9 100 100
IC 32,1 38,3 47,7 89,7 110,3 3,4 8,7 42,3 63,1
DC 43,8 43,2 52,1 64,3 64,6 2,1 1,3 57,73 36,9
Source: UN Department of Economic and Social Affairs, World Economic and Social Survey
2004: International Migration, NY, UN, 2004, Table II.1.
191 million people correspond to a share of the world population of around 3%.
Some 63% of these migrants live in the industrialised countries, where they account for
around a tenth of the population; 37% live in developing countries, where they made
up a seventieth of the entire population at the beginning of the millennium. 3 In the
1 These fi gures are based on Swiaczny, Frank, Internationale Wanderung als globales
Phänomen und seine Auswirkungen auf die demographischen Wandel in den Industrie- und Entwicklungsländern,
in: Neue Zuwanderergruppen in Deutschland: Lectures of the 7th Conference
of the Working Group of the Germany Society for Demography in cooperation with the Sociological
Institute of the University of Erlangen in Erlangen on 25th November 2005, Wiesbaden 2006,
pp. 127–158, here p. 129 ff.
2 UN, Department of Economic and Social Affairs (DESA), Trends in Total Migrant Stocks,
The 2005 Revision, Main fi ndings, p. 9. http:// www.un.org/esa/population/publications/migration/UN_Migrant_Stock_Documentation_2005.pdf.
A fi fth of this increase – i.e. around 25 million
international migrants – is attributable to the break-up of the USSR and Yugoslavia.
3 Swiaczny, Frank, Internationale Wanderung als globales Phänomen, loc.cit., p. 129 ff. The
fi gures for the distribution between IC and DC were changed in accordance with the 2005 UN revision
of the assessment of migrant levels (note 2).
405

last few years, the net fi gure of legal immigrants from the third to the fi rst world was
around 2.4 million annually. 4
Immigration to Europe has accelerated particularly in the 1990ies. Looking at the total
number of migrants, the US ranks fi rst (38 million), Russia – since the collapse of the
USSR – second (12 million) and Germany third (10 million). 5
According to UN estimates, by the year 2020, the following net balances of migration
(immigration minus emigration) are to be expected:
Table 3: Migration rates
406
Migration rate (net) Net migration (in thousands,
per annum, both
sexes)
Year 2005-10 2010-15 2015-20 2005-10 2010-15 2015-20
World 0 0 0 0 0 0
Africa -0,4 -0,3 -0,3 -366 -292 -325
Asia -0,3 -0,3 -0,3 -1191 -1197 -1204
Europe 1,1 1 1 792 704 704
Latin America
& the Caribbean
-1,2 -1 -0,9 -676 -617 -567
North Amerika 4 3,7 3,5 1350 1310 1300
Oceania 2,7 2,5 2,4 92 92 92
More developed regions 1,9 1,8 1,7 2301 2173 2163
Less developed regions -0,4 -0,4 -0,4 -2301 -2173 -2163
Least developed regions -0,1 -0,2 -0,3 -46 -223 -272
Source: World Population Prospects: The 2004 Revision Population Database (http://esa.
un.org/unpp/index.asp?panel=1).
Further ahead, in the period of just over 40 years to 2050, according to UN estimates,
a net fi gure of around 100 million will migrate from the third to the fi rst world (emigration
minus remigration; illegal/undocumented migratory movements not included).
The main sending countries in the next few decades will be China, Mexico, India, the
Philippines, Pakistan and Indonesia. The relatively important part that Eastern Europe
has played in terms of migratory movements within Europe in the last 15 years should
decrease as the population in this region itself begins to age.
4 Meeting the Challenges of Migration: Progress since the ICPD —prepared by the International
Migration Policy Programme (IMP), p. 14. http://www.unfpa.org/upload/lib_pub_fi le/334_
fi lename_migration.pdf
5 UN DESA, Trends in Total Migrant Stocks, The 2005 Revision, p.10. http://www.un.org/esa/
population/publications/migration/UN_Migrant_Stock_Documentation_2005.pdf

With all such forecasts it must be pointed out that the evidence to back them up is
thin. In many respects, they are no more than ceteris paribus projections of past migratory
trends. Newer and ever more intensive forms of migration such as short-term
and circular migration as well as illegal migration are either insuffi ciently represented
in these models or not at all. No matter how carefully and methodically these fi gures are
calculated, they remain, at core, speculative. Moreover, most sources lament a lack of
reliable data for the calculation of international migration fi gures.
I.3 Western Europe and international migratory fl ows
Most migrants in the next few years and decades will be heading for today’s industrialised
nations. Within this scenario, Europe will tend to become ever more attractive. 6
The UN expects that, in the future, Europe will absorb a third of the total net number of
international migrants. 7
Early in the decade (2003), a total of 23.5 million foreigners were living in Western
Europe. Of these, around 10 million were actively employed, an increase of 38% on 1995. 8
Assuming that migration levels in the coming years will be around the same as in the last
ten years, by 2020 the resident population of foreign extraction in Western Europe will
rise to 43.6 million. A growing proportion of these persons will be pensioners.
No account has yet been taken of the enlargement of the EU since 2004 in calculating
the numbers of immigrants expected to come to Western Europe (nor of the consequences
of Rumania’s and Bulgaria’s entry into the EU). Figures from Ireland and the UK
– which did not impose any restrictions on labour migration from new member states
– show that actual migration has far exceeded the numbers forecast. This is doubtless
the result of a considerable “rerouting” effect, with a disproportionate share of migratory
movements being redirected to the UK due to the entry restrictions in countries such as
Germany and France. Nevertheless, the numbers still do indicate that the migratory potential
from the new member states might be much greater than was at fi rst supposed.
I.4 Germany and international migratory fl ows
Within Europe, Germany – which is currently home to around one third of the European
population of foreign extraction (France 14%, UK12%, Italy 9%) 9 – will continue to be
the main country of destination for immigrants. If the existing trends persist, Germany
will continue to hold particular appeal for immigrants from Europe’s non-EU countries
and Eastern Europe, as well as having a particularly high infl ux from Turkey.
Germany can expect an infl ux of immigrants up to 2020 on around the same scale as
that of the last decade. In absolute fi gures, the UN estimates average net immigration levels
of around 200,000 persons per year. Calculations of the German Federal Statistical Offi ce
give net immigration scenarios of 200,000 to 300,000. Hence, the net immigration fi gure for
the period from 2007 to 2020 for Germany is expected to be around 1.4 million. This will
make Germany the second largest recipient of international migrants after the US.
6 Salt, John, Current Trends in International Migration, Council of Europe, January 2005,
CDMG (2005) 2, p. 4.
7 Swiaczny, Frank, Internationale Wanderung als globales Phänomen, loc. cit., p. 135.
8 Salt, John, Current Trends in International Migration, loc. cit., pp. 11 and 22.
9 Salt, John, Current Trends in International Migration, loc. cit., p. 11.
407

Net fi gures alone, however, say nothing about the true number of “new arrivals”. The
number of immigrants coming to Germany in the last fi ve years was around 840,000 per
annum, as against a fi gure of 640,000 for those leaving. 10 Basing projected fi gures on the
average for the last fi ve years, then some 10.9 million persons will migrate to Germany
between 2007 and 2020, of which 8.5 million will be non-Germans. Assuming that the
cultural and social integration of newcomers represents the real challenge ahead for those
Western European societies that attract immigrants, then these absolute fi gures more
clearly illustrate the scale of this task than the net fi gures. The simultaneous emigration
of native Germans and foreigners who have lived in Germany for some time makes the
task of integrating this signifi cant number of newcomers only slightly easier.
On top of this, the diversity of immigrants will increase and the foreign population
will in the future be much more heterogeneous, making economic, social and cultural
integration even more complicated.
The question where migrants will mainly come from in future is of signifi cant importance
for estimating not only the dynamics of future migration but also for estimating
costs, benefi ts and potential problems of integration. Basically, the more qualifi ed immigrants
are, the greater the probability that immigration will benefi t the recipient country
in fi scal and economic terms. Likewise, studies also show that the likelihood of a net
profi t for the receiving country is greater in the case of immigrants from countries with
higher per capita income (and thus better education and training). 11
On the face of it, this is good news for Germany, with its relatively large share of
immigrants from Eastern and South-East Europe. On the other hand, however, it must
be seen that, within this general pattern, one country –Turkey – plays a pre-dominating
role. Immigration from this country, however, is characterised by extremely low
levels of qualifi cation. Whereas, for example, the proportion of those Russians living
in OECD countries who were educated to university level is more than 40% and, for
Ukrainians, this fi gure still reaches 27.2%, for Turkish migrants in OECD countries (primarily
in Germany and the Netherlands) the fi gure is a meagre 6.3%. 12 This is one of the
reasons why the proportion of the foreign resident population in Germany educated
to university level is at 15.5% much lower than in, for example, Switzerland, the UK or
indeed France (2001 fi gures). 13 This structural peculiarity of German immigration has
become even more marked in recent years: Between 1996 and 2005, the proportion of
workers with few or no qualifi cations of the total coming into Germany rose from 25%
to 45%. 14
In generally, it must be supposed that the general educational level of immigrants
from Turkey and developing countries will remain below that of immigrants from European
countries. A report commissioned by the EU on the push and pull factors in migration
processes from developing countries concludes in this respect: “In comparison to
10 German Immigration Council, Migration und Integration – Erfahrungen nutzen, Neues wagen.
Annual report of the German Immigration Council, Nuremberg 2004, p. 66. Foreign nationals have
constituted 78% of (recorded) arrivals in the last fi ve years and 82% of exits.
11 „Studies show that the fi scal effects vary by national origin of the migrants, with higher benefi
ts fl owing from those coming from high GDP countries.“ Salt, John, Current Trends, loc. cit., p. 23.
12 ibid, Table 18.
13 13] ibid, Table 19.
14 Angenendt, Steffen, Stand und Perspektiven der deutschen Einwanderungspolitik,
Gutachten für die FES-London, Berlin 2007, unpublished manuscript, 31 pages, here p. 8.
408

western countries of destination, migrants’ educational levels, although increasing, are
still low, with many having no more than primary education”. 15
I.5 Unoffi cial migration
The fi gures given above for emigration and immigration do not include illegal migrants.
The number of illegal immigrants is, by the very nature of the subject matter,
diffi cult to determine and can therefore only be estimated using indirect indicators.
An OECD study estimates that the ratio of illegal to legal immigrants could be somewhat
higher in Europe than in the US. In this country the proportion is estimated at
around 3:1, i.e. for every three legal immigrants another illegal one can be added. 16
There are various differing estimates concerning the dynamics of illegal immigration.
In respect of Europe, a report for the European Council comes to the conclusion that
there are few indications that the extent of illegal immigration has increased signifi cantly
in recent years 17 . In contrast, the 2004 annual report of the German Immigration Council
refers to estimates according to which in the last decade the number of illegal immigrants
has been rising more sharply than other forms of migration (family reunifi cation,
labour migration, refugees and asylum seekers). 18 Most scientifi c studies assume that
the number of illegal immigrants will rise in the next few years. Not least, the growth in
specialised criminal structures supports this assumption: human traffi cking and people
smuggling have now become the third-largest area of international organised crime. 19
I.6 Demographic effects on Germany
The migratory movements expected in the next few decades will have no signifi cant
demographic effect on the sending countries, since population growth compensates
greatly for the effects of emigration. The situation will be quite different for the receiving
countries. In view of low birth rates, immigration is, on the whole, an important factor of
the demographic development. However, its overall effect should not be overestimated.
For Europe as a whole, immigration corresponded to only 10% of births in recent years
(Oceania 17%, North America 32%). 20
Even in Germany, a country with a very low birth rate, the effect of immigration on
the ageing process is relatively insignifi cant if one is not aiming – as, for example, in the
2002 UN model calculations for “replacement migration”– for massive population shifts. To
keep for example, the ratio of 15-to-64 year olds to those of 65 and over constant until 2050,
more than 180 million people would have to migrate to Germany over this period. 21
15 Eurostat/Netherlands Interdisciplinary Demographic Institute, Why do People Migrate?
Push and Pull Factors in International Migration: a comparative report, 2001, www.nidi.knaw.nl/
web/html/pushpull/index.html, p. 66.
16 Coppel, J./Dumond, J./Visco, I., Trends in Immigration and Economic Consequences, OECD
Economics Department Working Paper, No 284, OECD Publishing, 2001. p. 10.
17 Salt, John, Current Trends in International Migration, loc. cit., p. 3.
18 German Immigration Council, loc. cit., p. 32.
19 UN International Migration Policy Programme, Meeting the Challenges of Migration:
Progress since the ICPD, Geneva, no date, here p. 68, http://www.unfpa.org/upload/lib_pub_
fi le/334_fi lename_migration.pdf.
20 Swiaczny, Frank, Internationale Wanderung als globales Phänomen, loc. cit., p. 137.
21 Swiaczny, Frank, Internationale Wanderung als globales Phänomen, loc. cit., p. 150.
409

In respect to the sustainability of Germany’s pension system, calculations by the German
Federal Statistical Offi ce indicate that raising the age of retirement would have a more
positive effect than high immigration and a low increase in life expectancy combined. Overall,
it can be said that even in the long term – looking ahead to 2050 – “the demographic
effects of migration on the increase in the proportion of older people are very small”. 22
Table 4: Percentage of the German population of 20-to-65 year-olds according to different
immigration scenarios
410
2010 2020 2050
High-level immigration 61,3 60,6 55,2
Medium-level immigration 61,3 60,4 54,3
Low-level immigration 61,2 60,1 52,9
The scenarios are based on the mean increase in the average lifespan and the following levels
of immigration: high: more than 300,000 per annum; medium: 200,000 per annum (UN estimate),
low: 100,000 per annum.
Source:German Federal Statistical Offi ce,Bevölkerung Deutschlands bis 2050 – 10. koordinierte
Bevölkerungsvorausberechnung, Wiesbaden 2003, pp. 41-43.
It is inevitable that the effects of the low birth rate in Germany (1.4) will become
noticeable in Germany’s age distribution in the coming decades; immigration on the
scale expected will do little to change this. At the same time, it can be seen that other
industrialised countries such as France, Norway, the Netherlands and the US have birth
rates that render immigration virtually superfl uous as a stabilising demographic factor.
There is, from a demographic perspective, considerable room for manoeuvre for an active
population and family policy in Germany which would allow Germany to solve its
demographic problems largely by its own.
I.7 Dynamics of migration processes to 2020 and beyond
Considering the factors that drive international migration, it cannot be assumed that
the immigration pressure on the fi rst world will abate in any way as the world population
increases. Differences in demographic development are a negligible factor in this regard:
international migration is much more strongly infl uenced by other factors than by bare
demographic facts.
It is therefore advisable to treat with caution the immigration fi gures for Europe and
Germany estimated by the UN. According to this projection, immigration to Germany
will in future remain on the level of the average of the past 50 years. However, there is
a range of developments that gives cause to suppose that international migration will
rather increase in the future. 23
Differences in income and development
Historically, the most important incentive for international migration have been income
differentials between sending and receiving countries. Based on this assumption,
22 Swiaczny, Frank, Internationale Wanderung als globales Phänomen, loc cit., p. 146.
23 Stalker, Peter, Workers without Frontiers – The Impact of Globalization on International
Migration, ILO, Geneva 2000, pp. 117–128.

an increase rather than a decrease in worldwide migration is to be expected in the coming
years. Both the rate of growth in the Third World and the rate of global economic
growth were higher in the post-war decades than they have been since the current cycle
of liberal globalisation began in the early 1980ies. Accordingly, the relative gap in income
between the industrialised and developing countries – with the exception of China and
some other Asian countries -has widened in the last two decades. 24 Assuming that there
will be little change to this trend in the next twelve years and that an essentially liberal
world trade order will continue to obtain, then – despite the expected windfall profi ts
for exporters of raw materials – a large part of the developing countries can expect not a
closing of the income gap but a widening of it.
Even in the more dynamic developing countries and emerging markets, the “winners
of globalisation”, such as Turkey, China and India, the per capita growth rate will be
only around twice that of most industrialised countries. Given the huge differences in
their starting positions, the divide in absolute terms will therefore not narrow in the next
future but widen. 25 Even assuming that calculations based on purchasing power parities
show a somewhat more benign picture, it is nevertheless a fact that the central economic
pull factor for migration – a considerable gap in income between sending and recipient
regions – will continue to exist and may even become wider in many cases. Robert
Wades’ statement: “The fastest way for a poor person to get richer is to move from a poor
country to a rich one” 26 will still hold true in the future.
Communication, information and technological change
Historically, technological factors have always had a great infl uence on migratory
movements. The mass migrations from Europe to America in the 19th century only became
possible because the invention of ocean-worthy steamships created a cheap, reliable
method of mass transportation. Accordingly, intercontinental migratory processes
have received new impetus due to the improving communications and travel options
offered in the era of intercontinental fl ights, sinking communication costs and the new
types of communication offered in the internet age. 27 The hard and soft costs of migration
decisions tend to fall with these developments. At the same time, the growing interconnection
of commercial systems in the globalised world economy is proving to be
another factor that stimulates migration. 28
Migration networks
Migration leads to the creation of dense networks of contact and communication between
the countries of destination and the countries of origin of migrants. According to
24 Wade, Robert, Globalisation isn‘t working, Prospect Magazine, London, July 2006 and Weisbrot,
Mark/Naiman, Robert/ Kim, Joyce, The Emperor has no Growth: Declining Economic Growth
Rates in the Era of Globalization, Centre for Economic Policy Research, Washington, 2000 and Kozul-Wright,
Richard/Rayment, Paul, Globalization Reloaded: An UNCTAD-Perspective, UNCTAD-
Discussion Paper, Geneva 2004.
25 Deutsche Bank Research, Global Growth Centres 2020, Formel-G for 34 Economies, http://
www.dbresearch.com/PROD/DBR_INTERNET_EN-PROD/PROD0000000000185704.pdf
26 Wade, Robert, Globalisation isn‘t working, Prospect Magazine, July 2006.
27 Stalker, Peter, Workers without Frontiers, loc. cit., pp. 117–128.
28 Deutsche Bank Research Centre, Technology boosts trade boosts migration. On the interplay
of three key globalisation phenomena, DB Research 26.9.2006. www.dbresearch.com.
411

modern migration theory, these networks are an important factor in migration decisions,
since they tend to lower the costs of migrating and facilitate the initial establishment of
migrants in the destination countries. To the extent that past migration processes have
resulted in fi rmly established diasporas in the industrialised countries, the migration
decisions of successive migrants are made considerably easier. 29 Moreover, established
migration networks tend to reinforce existing migration patterns.
Urbanisation and social change
Historically, international migration has been strongly related to rural-urban migration.
The fi rst step in migratory movements is often enough that from rural areas to the
slums of the growing cities; if employment or economic prospects cannot be realised
there , international migration might follow as circumstances allow. In this respect, the
ongoing trend towards urbanisation in the developing countries is also an indicator for
growing international migration pressure. Urbanisation will increase considerably up to
2020, particularly in Africa, while it will stabilise to a high degree in the other regions of
the Third World.
412
I.8 Additional push factors for ecological reasons?
It is diffi cult to calculate the effect of future climate change on migration potentials
and trends. The German Immigration Council sees a cluster of factors here that may have
a powerful effect on future migratory movements. 30
However, looking at the calculations of the Stern Review of November 2006, it can
be concluded that climate change will have hardly any effect in the period in question.
Increases in average temperature in the range of 1 degree Celsius – more is not to be
expected by 2020 – will, according to the Stern Report scenarios, affect only food production
in some regions of the Sahel (the UN Intergovernmental Panel on Climate Change
estimates in its last report from early 2007 an average rise in temperature of 0.2 degrees
Celsius in each of the next two decades).
Even with a rise in temperature of 2 to 3 degrees by the end of the 21st century, says
the Stern Report, the economic losses will amount to only 5 -10% of global per capita
consumption (i.e. the global social product would be 5 -10% lower than with no climate
change). In view of the tremendous potential for productivity growth in most areas of
material production in the next hundred years, these developments seem unlikely to
trigger large migratory movements, even if for some of today’s developing countries the
damage might be signifi cantly higher than 10% of GNP. 31
29 On the importance of networks for migration decisions among migrants living in Europe,
see also Eurostat/Netherlands Interdisciplinary Demographic Institute, Why do People Migrate?
Push and Pull Factors in International Migration: a comparative report, 2001, www.nidi. knaw.
nl/web/html/pushpull/index.html, pp. 93-99.
30 German Immigration Council, loc.cit., p. 42 f.
31 Stern Report, The Economics of Climate Change, London, 2006, Executive Summary, pp.
VIII–X. Even the collapse of the economies in Eastern Europe after the change of system, which led
to a drop in per capita income of 25–30% in a very short space of time, did not result in migratory
processes on a scale that would necessarily be described as extremely problematic for countries of
destination in western Europe.

II. GERMAN AND EU POLICY TO DATE FOR CONTROLLING INTERNATIONAL
MIGRATION
German policy roughly follows the global political mainstream which is increasingly
aiming to control and manage migration. Worldwide, governments are increasingly preoccupied
by the level of migratory movement and are accordingly trying to regulate these
processes. Since 1974, the Population Unit of the UN Department of Economic and Social
Affairs has been following the attitudes and views of governments worldwide on migration
issues and how these attitudes and views develop. While the topic was of hardly any importance
in the mid-70s, since then there has been a trend of increasing concern about the
extent of global migration. Around one third of governments from industrialised countries
declared in 2001 that, in their opinion, migration levels were too high. An additional 21%
of governments of developing countries found migration levels too high. The proportion of
governments implementing policies to reduce immigration rose from 7% in 1976 to 40% in
2001. 32 This trend is expected to become stronger in the coming years.
II.1 Germany policy on immigration control 33
In the past, immigration control in Germany has been characterised by a plethora of
generally uncoordinated, selective measures. These did often have the intended effect,
but were never incorporated into a coherent overall plan. It must also be borne in mind
that within the EU, any comprehensive, strategic control of immigration by single member
states is possible only to a limited extent.
a) Family reunifi cation: this currently represents the most important source of immigration,
not only in Germany, but also in Western Europe as a whole. Permission
for family reunifi cation immigration is in principle a sovereign decision of the German
Federal Government. Its discretion in this matter is however qualifi ed by the protection
of marriage and the family, as fi rmly laid down in public international law, European
Community law and the German Constitution. The immigration of family members cannot
therefore be controlled in an arbitrary manner. Within this context, the government
can assess and weigh up against each other the public and private interests that argue
for and against a family reunion. Control of this type is based on reunion rules specifi c
to spouses, partners, children and other family members respectively, mostly by means
of qualifying periods for immigration to Germany or using age specifi cations, for which
there are now also mandatory European requirements.
b) Labour migration: immigration permission for employment purposes is at the sole
discretion of each country due to the lack (as yet) of any European or international regulations
thereto. Instruments targeted at controlling labour migration are work permits and
work prohibitions. In the past, German governments have applied restrictive instruments,
particularly to asylum seekers, refugees, relatives of immigrants and students. These instruments
have been modifi ed frequently according to the labour market situation. For
the purposes of indirect control, individual priority tests are also used, specifying which
32 UN Population Division, International Migration Report 2002, pp. 17–18. http://www.un.org/
esa/population/publications/ittmig2002/ 2002ITTMIGTEXT22-11.pdf.
33 The account given of German immigration control is based on the text of the report by Steffen
Angenendt commissioned by the FES London (note 15) and the relevant chapter of the report of the
German Immigration Council.
413

groups of persons have access to the labour market in which order. Nevertheless, these restrictive
instruments are greatly qualifi ed due to the freedom of movement for workers set
out in Article 39 of the European Community Treaty. On expiry of the transitional periods
for the EU-10 and Rumania and Bulgaria, then, by the middle of the next decade, the German
labour market will be open to all EU citizens with no restrictions.
c) Asylum seekers: The most powerful instrument for controlling immigration of asylum
seekers has been the restriction imposed in 1992 on the right to asylum as guaranteed
in the German Constitution. Victims of political persecution do continue to receive
protection, but any “non-imperative” request for the right to asylum is to be blocked. The
duration of the asylum procedure has been shortened and the number of asylums seeker
reduced. The improvement of identifi cation procedures has made it easier to uncover any
abuse by asylum seekers with multiple applications under various identities. Other controls
have been the reduction of social benefi ts by revising the Asylum Seekers’ Benefi ts
Law and the reallocation of asylum seekers to other European countries.
In addition to these group-specifi c instruments , there are other instruments used to
control migration in general, including repatriation. Often there is, however, no repatriation
because identities are unclear, ID documentation is missing, no information is provided
or because the (alleged) countries of origin do not wish to take their citizens back.
To avoid this, readmission agreements are concluded, regulating technical matters among
other things. Since voluntary return is deemed the best option for those required to leave,
the German government assists these persons by means of certain programmes and by cooperating
with transit countries and the countries of origin. Since many foreigners without
residence permits cannot be deported due to legal or actual obstacles to deportation and
often live for years in Germany with only temporary suspension of deportation, there have
been repeated legalisation campaigns (“regulations on long-standing cases”).
414
II.2 The EU as a framework for German policy measures 34
A Common European immigration and asylum policy has continued to gain importance,
not least due to Germany’s active role in shaping such a policy. While the Maastricht
Treaty of 1992 defi ned some areas of asylum and immigration policy as “matters
of common interest” and thus initially envisaged cooperation of only the member states,
the Amsterdam Treaty of 1997 transferred the areas of visa policy, immigration and asylum
to a common policy context (Art. 73). The Treaty of Nice, which came into force on
1st February 2003, sets out an automatic transition to qualifi ed majority decisions in the
area of asylum and refugee policy where common rules and principles are stipulated for
this area. Moreover, the principle of the freedom of movement of workers within the EU,
which is gradually coming into force for all member states, will have a considerable effect
on migration to Germany.
In Articles 61 to 63 of the Treaty Establishing the European Community amended in
1997 in Amsterdam (EC Treaty) the areas of common immigration and asylum policy are
set out:
– External border controls
– Issuing of visas, entry, residence and freedom of movement of nationals of third
countries
34 The key elements of the account given are based on the relevant chapter of the report of the
German Immigration Council, loc cit., pp. 125-168.

– Criteria and mechanisms for determining which member state is responsible for considering
an application for asylum
– Minimum standards for the reception of asylum seekers, for qualifi cation of nationals
of third countries as refugees, for procedures for granting or withdrawing refugee
status and for giving temporary protection
– Measures to counter illegal immigration and illegal residence, including repatriation
of illegal residents
The European Council decision adopted in Seville in June 2002 to include migration
issues in EU trade policy, development policy, foreign and security policy and in other
areas of cooperation with third countries was supposed to combat the causes of migratory
movements and to reduce the extent of both legal and illegal immigration. Better control
of migratory movements should be achieved by the Comprehensive Plan to Combat Illegal
Immigration, the Plan for the Management of External Borders and the Directive laying
down Minimum Standards for the Reception of Asylum Seekers in Member States. The
combating of illegal immigration should also be refl ected in the relations of the EU with
third countries. By intensifying economic cooperation, trade, development aid and confl
ict prevention, the economic prosperity of the countries concerned should be promoted.
Readmission agreements and “migration clauses” for cooperating in immigration matters
should play a central role in future in EU cooperation and association agreements.
At the European Council Summit in Thessaloniki in June 2003 the freedom of movement
of EU citizens and their families was re-regulated , giving greater equality with
nationals of the member states in question, and family reunion of third country nationals
was standardised in key areas. For non-EU citizens, a right of permanent residence and
right of resettlement were established.
The rules made at EU level are already today strongly determining the ways immigration
can be controlled by the member states. In view of this development, the issue
in future will be less that of developing national solutions but of representing German
interests as effectively as possible at EU-level negotiations. The most diffi cult task here is
that of regulating labour migration. In the draft text of the EU Constitution it was stipulated
that member states alone decide the level and conditions of entry of third country
nationals to the national labour markets. If, in the future, common rules are sought beyond
this formulation, the problem would be to fi nd rules capable of doing justice to the
extremely diverse economic, demographic and social realities of a very heterogeneous
economic area of 27 member states and their populations.
III. 2020 SCENARIOS
III.1 Crises in the south, crises in the east – and the Pope is no longer German...
In 2020, in some parts of the Christian and Islamic worlds a political consensus has
been reached that birth control amounts to interference in the divine plan for creation.
The growing infl uence of fundamentalist currents has become manifest in all kinds of different
forms – in the Near East, with the election victory of the Muslim Brothers in Egypt,
in the US, with the election victory of an “Evangelical” in the 2016 presidential elections,
and in Latin America, where conservative church groups (helped by the closely-knit network
of educational institutions that organisations like Opus Dei and Legionarios de
Cristo had build up in the past) were exerting growing pressure on politicians. There had
415

een already dissent about the role of contraceptives and family planning at the 2014
World Population Conference in Santiago, Chile. Here, an array of countries announced
that they were to pull out from the objectives set out in Cairo in 1994 for controlling the
growth of the world population. After the election victory of the “Evangelicals“ in the
US, development aid and trade privileges were linked to the waiving of family planning.
The large scale production of a cheap AIDS drug by a Chinese-American pharmaceutical
company has put paid to the campaign to use condoms in parts of the developing world.
Likewise, in 2016, with mass production of an effective anti-malaria drug, funded by the
Bill & Melinda Gates Foundation, it has been possible to contain one of the deadliest illnesses
in the tropics.
In the wake of these developments, the population begins to rise sharply again in
many developing countries – particularly in the Islamic countries, in sub-Saharan Africa
and in some parts of Latin America. The Angolan Pope Pius XIII calls each birth a “triumph
of hope for a better tomorrow on the Lord‘s Earth“. Likewise, Islamist groups refer
to an “Intifada of women in childbed“, that will bring with it victory over an increasingly
ageing West.
The ageing of the Western world, particularly of Europe, is, however, relative; the migratory
movements to Western Europe – legal, but increasingly also illegal – could never
really be brought under control. Instead of the expected 8–9 million, in the ten years
from 2010 to 2020, a net fi gure of more than 25 million people have migrated to Western
Europe. The causes of this development are various:
– The unfolding crises in north Africa have become more acute with the systemic crises
in Morocco and Tunisia, the unrest akin to civil war in Egypt after the assassination of
President Gamal Mubarak, and the unrelenting tensions in the Middle East. One notable
exception in all this has been Algeria, which, thanks to the Sonatrach-Gazprom gas
cartel, is earning enormous export revenues. These developments have led to a sharp
rise in migration to Southern Europe and France, then further on too to the traditional
recipient countries of north African immigrants in Northern Europe, particularly the
Netherlands and the UK. At the same time, the continuing economic decline of sub-
Saharan Africa has caused a further rise in numbers emigrating from this region.
– EU-membership has failed to consolidate the economic situation in Central Eastern
and South-Eastern Europe, leading to even greater immigration pressure on Western
Europe. Despite considerable EU transfers to these regions, it has not been possible
to protect the industrial core of the economies of Central Eastern and South-Eastern
Europe from the growing competition from East Asia and India.
– Lack of consensus and different assessments of the signifi cance of mass immigration
to Europe has prevented any effective EU policy on migration control being implemented.
Flanked by the pro-immigration media campaigns of the Murdoch group, the
“Wall Street Journal” and the “Economist”, an alliance of economic lobbyists (under the
leadership of the European employers‘ union, UNICE), immigrants‘ associations and a
range of NGOs has established a campaign entitled “Europe without Frontiers/Europe
sans Frontières“, which has prevented any effective control of the EU‘s external borders.
Under these circumstances, it has never been possible for the EU to implement
its resolution on a coordinated immigration policy (CEIP/Coordinated European Immigration
Policy) to control the immigration pressure from the “arc of crisis” in the Near
and Middle East and from the new “rust belt“ in Eastern and South-Eastern Europe. In
the CEIP, the EU nations had agreed in 2015 to strengthen the coordination of the im-
416

migration controls thus far in place. This would take the form of, for instance, an EU
right of codetermination for legalisation campaigns in individual member states and
the option that countries could impose their own migration limits with reference to the
new EU members in the Balkans. There would also be a common points system (European
Skilled Migration Scheme) for controlling immigration more strictly according to
labour market requirements and immigrants‘ qualifi cations.
III.2 Muddling through successfully
By 2020, the global birth rate has fallen slowly, in line with the UN “medium scenario“
for demographic development in the world. There is a general consensus (which,
at least in the West, is not questioned) that the slowing of population growth is one of
the more effective tools for combating poverty in the developing countries. After 2010,
when the Catholic Church, under the leadership of Pope Benedict XVI, authorises the
use of condoms as the “lesser evil“ in view of the “greater evil“ of AIDS, the use of this
form of contraception increased. However, social changes too have played a role here:
the processes of democratisation in the Islamic world are slowly leading to greater social
autonomy for women, with a concomitant effect on the use of contraceptives and the
numbers of births per woman.
At the same time, economic growth in traditional sending countries has been more
positive than could have been expected. Parts of north Africa and sub-Saharan Africa
(here particularly the countries in the oil and gas-rich Gulf of Guinea) have seen a stabilisation
of economic growth through signifi cant price increases for raw materials. Turkey
has been able to maintain its position as a medium-sized emerging economy, with reasonably
strong growth despite the high level of competition from East and South-East
Asia; the country succeeded especially to expand its economic infl uence in Central Asia
and the Black Sea area. Since the country‘s education system could not meet the demand
for skilled labour, the government in Ankara started a widespread “return campaign“ in
2018 aimed at the Turkish disapora in Europe. This campaign had only limited success
because most second and third-generation Turks felt too deeply rooted in their countries
of birth. Nevertheless, the campaign has positively changed the perception of the Turkish
population of the long-term prospects of Turkey‘s economy and has resulted in a
decrease in the number of emigrants.
The economic growth of Eastern and South-Eastern Europe has progressed slowly but
steadily. Competitive advantages based on low labour costs coupled with a continuously
improving infrastructure have let to a steady relocation of labour-intensive production
from Western to Eastern and South-Eastern Europe. While Western Europe was loosing
industrial jobs, unemployment in the erstwhile “new member states“ has been falling
continuously. At the same time, the effect of the post-communist demographic collapse
of the early 1990s has led to a sharp drop in the number of young people entering the
labour market in these countries.
At EU level, a compromise for dealing with immigration was found in 2015 with the
“Coordinated European Immigration Policy“ (CEIP). This was based on:
– an agreement on a common policy of external border controls against illegal immigration
while ensuring that humanitarian principles were upheld; here a central emphasis
has been put on cooperation with the north African countries.
417

– Better coordination of policies regarding legal immigration, with key provisions referring
to the right of EU countries to have a say in legalisation campaigns of individual
member states and the establishment of common minimum standards for granting
rights of residence and citizenship.
– Creation of an EU-wide points system similar to the Australian model, seeking to
manage immigration according to the needs of the labour market and the skills of immigrants.
The most diffi cult problem to solve in this context has been that of family
reunifi cation. Ultimately, an agreement was found, based on promoting “pre-emptive“
language acquisition and staggered waiting periods depending on education and
skill levels of applicants.
In sum, the somewhat lower immigration pressure and the implementation of targeted
policies to control immigration result in immigration levels that, albeit still considerably
higher than estimated at the start of the millennium, lead neither to huge
distortions of the labour markets nor to serious problems with the integration of immigrants.
418
IV. RECOMMENDED GERMAN POLICY APPROACH
There are no short and medium term policy interventions that would have an effect
on most determinants of global population growth. Population growth is a matter of extremely
slow social processes that only change over the long term.
With migration policy the situation is similar, although the possibilities of effective
intervention are greater here. The one area where there is potential for effective action is
that of immigration control.
By contrast, the room for manoeuvre for governmental policies to infl uence the
key factor triggering international migration – the global economic north-south divide
and the income differentials this implies – is extremely limited. Basically, seen from
the point of view of the economic interest of the developing countries (excluding east
Asia, which is profi ting greatly from the current trend) it would be advisable to simply
abandon the experiment of neo-liberal globalisation in its current form. Since this
is extremely unlikely to happen, policy-makers can, at best, offer palliative measures
within the framework of the existing world economic order. Opening markets to agrarian
exports from developing countries would be one such possibility. However, only
some regions would benefi t from this. This would be those regions which dispose of
the necessary combination of natural resources and technical and commercial knowhow
(as in Latin America, for example) that is the prerequisite for successfully making
use of these market opportunities.
The same reservations apply to development cooperation. Development aid has hitherto
failed to show that it can make any really signifi cant contribution to poverty reduction
or economic growth in the recipient countries. It should therefore in future be
granted primarily as part of a policy of enlightened self-interest according to geostrategic,
commercial and political interests of the donor country. In the context given, this means
that migration aspects should play a far greater role in future. Development cooperation
should be linked to a much greater extent than hitherto to the recipient countries‘
willingness to cooperate in this area, especially with respect to the fi ght against illegal
immigration.

IV.1 Action on population growth
Since the growth of the world population takes place to a great degree in the developing
world , the chances of German policy infl uencing this are extremely slim. It therefore
makes little sense to concentrate foreign or development policy resources too much on
this area. Never the less, German policy-makers can and should
– seek out dialogue with the German churches, particularly with the Catholic church
and make it clear that they consider the ban on contraceptives misguided;
– counter the attempts of conservative groups, particularly in the US, to undermine
family planning measures and the use of contraceptives in developing countries and,
where necessary, actively advocate the retention and/or stepping up of such programmes
and provide the necessary resources for this;
– take greater account of migration and population growth potentials when determining
the priorities of German economic, fi nancial and technical cooperation. Due to
the existing immigration structure in Western Europe and Germany, this primarily
means making North Africa, the Middle East (including Turkey as the country with
the greatest potential for immigration to Germany) and Eastern Europe the focus of
cooperation in terms of bilateral and EU neighbourhood policy.
IV.2 Action on Immigration
Given the expected rise in immigration pressure from developing countries, Europe
must develop a clear strategy for channelling and managing this pressure in future. Three
types of emphasis come to the fore in this respect:
– Developing a clear system of controlled immigration that regulates immigration in accordance
with the requirements and potentials of the labour market, taking into account
the burden on the social security systems as well as demographic trends. Here,
it is advisable to develop a points system such as the Australian one which, based on
human capital and the likelihood of successful integration, promotes the immigration
of the well-qualifi ed and the young. Some tough decisions will have to be taken here
in relation to family reunifi cation. This has been the main type of immigration to the
industrialised countries for some time now. From a labour market and integration perspective,
however, it is not without its problems. Here too, it would be desirable, in line
with, for instance, current proposals in the Netherlands and the UK, to develop a system
over the medium term that ties family reunion to a minimum level of education and
language profi ciency and is dependent on active participation in integration measures.
To manage immigration effectively, however, also the necessary analytical tools must
be developed, by which the demand for workers and immigrants can be forecast to a
suffi ciently accurate degree in the fi rst place.
– Tighter control of the EU‘s external borders through effi cient, coordinated measures.
This is conceivable only if the transit countries in the Mediterranean basin and in
Eastern Europe are involved in this policy and cooperate with it. It will be necessary
therefore to develop effective “incentives“ for cooperation for the governments
of these countries.
– The effective enforcement of existing legal provisions and the better control of information.
This seems particularly important in view of the growing problem of illegal
immigration, human traffi cking and people smuggling. Also immigrants are “rational
economic men“, particularly those who raise considerable sums to pay for the serv-
419

ices provided by the international people-smuggling networks. As with any economic
decision, a migration decision is based on assessments regarding the probability of
success and the costs and benefi ts of such an undertaking. Accordingly, existing legal
provisions should indeed be implemented to keep any ambiguities and overblown expectations
to a minimum. The current bland approach to law enforcement in this area
symbolized by the repeated legalisation campaigns for illegal residents in various
European countries – invites people to try illegal immigration even if they know that
it is an illegal undertaking in the fi rst place. In this context, it will also be important
to change the incentives involved in employing illegal immigrants. Businesses employing
illegal immigrants (often under extremely exploitative conditions), should
be heavily sanctioned and the punishments for illegal staffi ng should be made much
more severe. Moreover, there should be much more intensive, systematic provision
of information in the regions sending illegal immigrants as to the legal status and the
admission, working and living conditions in Western Europe.
At the same time, German policy-makers should not allow themselves to be persuaded
that immigration will solve the problems of an ageing society. Encouraging immigration
of the young and well-qualifi ed will certainly have to provide part of the solution.
Yet, in view of the long-term sustainability of the German economic and social welfare
system, an active family and population policy will be of much greater importance; the
aim being to bring the German birth rate to the level of its Western European neighbours
such as France or the Netherlands. Furthermore it will be necessary to strengthen the
participation of women in the labour market, to raise the retirement age and to reform
parts of the social security system and its funding mechanisms and to change the inherent
“live style” incentives these systems create.
On the author: Ernst Hillebrand is a political scientist and director of the London Offi ce of the Friedrich-
Ebert-Stiftung.
420

HUMAN RIGHTS AND INTERNATIONAL SOCIAL
POLICY
Erfried Adam
This article authored by Erfried Adam was originally published by Friedrich-Ebert-
Stiftung, Department for Development Policy, Berlin, 2007
ABSTRACT
As a reaction to the catastrophes of the 20 th century – World War I, fascist tyranny,
holocaust, dictatorship and World War II – international organisations to prevent their
recurrence were established: fi rst the League of Nations and the International Labour
Organization in 1919 and later the United Nations in 1945. A feature common to the
UN Charter, international law, human rights and social standards is their underlying
purpose of safeguarding peace within and beyond national boundaries and giving people
freedom, equality and social progress. Through these organisations, multilateral rules to
constrain the anarchy of power are put in place by joint endeavour and backed up by a
call for collective commitment by the community of states to apply and safeguard those
rules. As a value orientation, human rights lay the foundation of the democratic order.
Their primary function is a protective one, shielding citizens from the state and its possible
claim to absolute power. They serve to constrain state hegemony and arbitrary rule
by the state, to protect the individual as a “human” being, and provide the foundation for
enshrining in law the relationship between state and citizen. They are the cornerstone
for constitutionalising the international order. The debates on the UN’s 60-year track
record of policymaking in the fi eld of human rights focus on disputes about the universality
of these rights’ validity, their interdependence and status ranking, and particularly
the relationship between state sovereignty, under the terms of which human rights fall
within the “domestic competence” of states, and a common responsibility incumbent
on the community of states as a whole for their protection and implementation, from
which control functions and even – in extreme circumstances – the right to intervene
could be inferred. Whereas under conditions of ideological antagonism, human rights
and international social standards are deemed also to have politico-instrumental functions,
their validity is today being additionally called into question by power shifts within
the international system, diminishing credibility on the part of the proponents and the
increasingly fi erce competitiveness confl ict associated with globalisation.
Against the backdrop of its history, Germany has reached a remarkably reputable position
within the international system but, in the estimations of many, is strangely self-effacing
and is failing politically to mobilise its full potential. Coordination and coherence represent
the biggest challenge to international organisations and the policies of their member
states. The international organisations’ ability to take the lead is determined largely by
what the member states instruct and empower them to do. Their power to shape globalisation
and the international order is exercised vicariously. Taking responsibility and the
political initiative are incumbent on the member states and their willingness to explore
421

policy options, to reach consensus and reconciliation of interests as well as their readiness
to offer substantial material incentives. This applies as much to human rights policy and
international social policy as it does to safeguarding peace and to global economic and
development policy. What is required here is tangible and practical action by states and an
assured and coordinated approach to action in all arenas within the international system.
Germany will only be able to play an active role on the international stage if it succeeds
in coping with the challenges of demographics, inter-generational confl ict and social competition
and thus also secures human rights and social equity both within and beyond its
national borders. A country which is torn apart by inter-generational confl ict, xenophobia
and social division foregoes its ability to act on the international stage and exert its infl uence
on the policies of international organisations.
422
I. FRAMEWORK CONDITIONS – MULTILATERAL RESPONSES TO THE MAJOR
GLOBAL CRISES
Social issues have constituted human history. Economic development necessarily
leads to social change, incremental or on the scale of social turmoil, which in turn provokes
political reactions, adjustments and transformations. In modern times, efforts to
control this process and seek reconciliation and integration have become a substantial
focus of politics – and not necessarily only of democratic politics. Modern political parties
position themselves within this process and seek thereby to obtain legitimacy and
popular support.
The internationalisation of production and the liberalisation of capital and fi nancial
markets which have taken place within the process of “globalisation” have sharpened
the profi le and speeded up the pace of this fundamental dynamic process in society,
but they have also had some dislocating effects on it: social disparities have widened
both within states and between world regions, with some regions being left ever further
behind in terms of economic and social progress while others are fi nding that
economic progress is bringing precarious employment and social and ecological crises
in its wake. Whereas traditionally the confl ict over control and distribution has been
confi ned largely to the national level, it has now become part of both international
competition and intergovernmental and multilateral efforts to manage, attenuate or
even reconcile interests with a view to mitigating social confl ict and avoiding inter-state
confl ict wherever possible.
Alongside stating a commitment to promoting social justice as a precodition for universal
peace, the preamble to the Constitution of the International Labour Organization
(ILO), drafted in 1919, makes it amply clear that the mandate of the organization is positioned
within a context of competition; it emphasises: “[…] the failure of any nation to adopt
humane conditions of labour is an obstacle in the way of other nations which desire to improve
the conditions in their own countries.“ Minimum standards in international law were to give
this competition a framework and limits within which to operate and thereby prevent „social
dumping“. Proceeding from the core tenets of the Declaration of Philadelphia (1944),
“labour is not a commodity”, “freedom of expression and of association are essential to sustained
progress” and “poverty anywhere constitutes a danger to prosperity everywhere”, the
partners in the ILO’s tripartite management structure have developed a complex system
of international labour standards which can be presented only in outline here.

The reference to peace, freedom, equality and social progress is also a key element
of the UN Charter, the Universal Declaration of Human Rights and the human rights
conventions which ensued in reaction to the turmoil of the inter-war period, World War
II, fascist tyranny, holocaust and dictatorship.
I.1 International labour standards
A legacy from the preceding League of Nations age, the ILO was the fi rst organisation
to become part of the new United Nations system and the fi rst UN specialised agency. It
now has 177 Member States and a tripartite management structure which is unique within
the international system and allows for national delegations to include, alongside two
government representatives, one representative each of employers’ and workers’ organisations
within that Member State. The ILO’s main task is to establish standards and monitor
compliance with them. The basis and core of the ILO’s work in this fi eld is its body of
international labour standards (also abbreviated to ILOLEX), which currently incorporates
376 individual standards, more specifi cally 184 conventions and 192 recommendations.
Far from being indiscriminately imposed rules and regulations, these international labour
standards are the outcome of a democratic process engaged in by representatives of government,
business and unions from the Member States around the world. They are fi nally
adopted by the International Labour Conference, the supreme decision-making body of
the ILO. The standards are the result of a process during which the interests of the various
Member States and their respective employer and employee representations are reconciled;
they are thus in the nature of a compromise reached out of a situation of confl icting interests
between nations and confl icting interests between capital and labour.
The international labour conventions have the status of international treaties and
have to be adopted by a two-thirds majority of the delegates to the International Labour
Conference. They are legally binding once they have been ratifi ed; prior to ratifi cation
they have the status of objectives. Recommendations are non-binding technical or policy
guidelines, often accompanying a convention, and are not subject to ratifi cation. Ratifi -
cation is the act which commits a Member State to implement a convention in national
law and report regularly to the relevant ILO monitoring mechanism. At the request of
the Governing Body, 1 a Member State may be obliged to report on matters falling within
the scope of a particular convention even if it has not ratifi ed that convention. The core
Convention on Freedom of Association and Protection of the Right to Organise (No. 87)
is deemed to be a constitutive element of membership for all Member States irrespective
of formal ratifi cation.
The international labour standards have universal status, i.e. all states, irrespective
of their level of economic development or social and political system, should be capable
of ratifying and implementing them; because of this universality, international labour
standards are often drafted to allow for a certain amount of fl exibility and moreover have
a promotional thrust insofar as they oblige states to do everything in their power to bring
1 The Governing Body is the executive organ of the International Labour Offi ce and, after the
International Labour Conference, the most important body of the organisation. It is composed
of 56 titular members (28 representatives of government, 14 representatives of employers and 14
representatives of employees) plus 66 alternate members (28 representing government and 19 employers
and employees respectively). The 10 most important industrial states, including Germany,
have permanent seats on the Governing Body.
423

about improvements. For many conventions, ratifi cation has been inadequate; 2 other conventions
have become obsolete in many respects. Work has therefore started on reviewing
the conventions for up-to-dateness to establish their contemporary relevance.
Important for the clout of the ILO’s international labour standards are their relevance,
their universality and their implementability. The last feature is the decisive characteristic,
for standards which cannot be enforced and supervised are toothless, a nice
idea bereft of genuine impact. To deal with this aspect, the ILO has developed an international
supervision mechanism which can undoubtedly be considered exemplary
in terms of its effectiveness and effi ciency and provides a comprehensive overview of
thousands of documented cases. Essentially it is a complex mechanism of interaction
with the Member States involving periodic national reporting (Article 22), comments
by the social partners, study by an international Committee of Experts, 3 deliberation
in special committees of the Governing Body (e.g. the Committee on Freedom of Association),
and fi nally deliberation by the International Labour Conference itself. The
procedure under Article 19 for conventions which a Member State has not ratifi ed is
similar. The provisions of Article 24 admit representations from an industrial association
of employers or workers alleging non-compliance with ratifi ed conventions – the
so-called non-observance of conventions procedure – and the Governing Body “may”
communicate any such representation to the governments concerned. Under the provisions
of Article 26, a complaint may also be fi led by a Member State government
against another Member State government. The Governing Body then takes decision,
on the basis of a report drawn up by a Commission of Inquiry, on what measures need
to be taken. The government concerned can then, of right, appeal to the International
Court of Justice or can accept the recommendations – and monitoring compliance
again becomes an issue. The ILO is trying to address these enforcement weaknesses
– weaknesses which are inherent in the system of multilateral organisations – in various
ways, including efforts to strengthen political will:
1. By means of actively supporting implementation of the international labour standards
on the basis of ‘’technical cooperation’’ and the establishment of multidisciplinary
advisory teams working with an integrated approach in all regions of the world.
2. By actively promoting the social dialogue at national level in each Member State, a process
which covers all varieties of negotiation, consultation and exchange of information
between governments, employers and employees, is described as both a “means and an
end”, and represents a very sizeable strategic aspect of the ILO’s work.
2 The ratifi cation score differs very signifi cantly from one convention to another; presumably
the highest score, 152 countries, is held by the conventions on the elimination of child labour. A
rating dated 5 th November 2003 indicates that 99 states have ratifi ed all core conventions (see note
11). Included in the list is Germany, which has ratifi ed a total of 77 conventions, of which 67 are in
force. The USA has ratifi ed only two of the core conventions: no. 105 (forced labour) and no. 182
(child labour) – it has not ratifi ed the convention on freedom of association!
3 The Committee of Experts on the Application of Conventions and Recommendations, which
currently has 19 international members, is convened by the Governing Body at the proposal of
the Director-General. Cf. Eric Gravel/Chloé Charbonneau-Jobin: The Committee of Experts on the
Application of Conventions and Recommendations: Its Dynamic and Impact, ILO Geneva 2003;
Isabelle Boivin/Alberto Odero: The Committee of Experts on the Application of Conventions and
Recommendations: Progress achieved in national labour legislation, in: International Labour Review,
Vol. 145 (2006), No. 3.
424

3. By politically recognising and endorsing the core labour standards, with considerable
media effect, through the ILO Declaration on Fundamental Principles and Rights at
Work, adopted in June 1998 by the 86 th International Labour Conference.
4. Through the Decent Work programme with its four strategic goals: right to work,
employment, social protection and social dialogue.
The ILO ‘’Declaration on Fundamental Principles and Rights at Work’’, together with
its four underlying principles, has earned broad international recognition and has subsequently
been incorporated into various international agreements, declarations and
guidelines (such as OECD guidelines and the UN Global Compact). Its four underlying
principles are: (1) freedom of association and protection of the right to collective bargaining,
(2) elimination of forced labour, (3) effective elimination of child labour and (4) elimination
of discrimination in respect of employment and occupation. A special, augmented
reporting procedure which is equally mandatory for Member States which have not fully
ratifi ed the core labour standards, and the InFocus Programme on Promoting the Declaration
have in turn added further weight and given a binding character to the ILO
Declaration on Fundamental Principles and Rights at Work. The core labour standards
therefore undoubtedly qualify as belonging to the the ius cogens of public international
law; 4 they amount to more than merely “soft law”.
The ILO’s Decent Work programme has also meanwhile met with extensive political
endorsement as both a global and a national goal, as witnessed, for example, by its support
from the UN Millennium Summit (September 2005) 5 and from the EU Commission. 6 In October
2000 the ILO itself launched a Decent Work Pilot Program and since 2005 has been
applying the lessons learned thereby in Decent Work Country Programs in its Member
States. Essentially, however, it is a truism that implementation of the international labour
standards on the ground depends on the readiness of the respective government to implement
them, on the available political will, on democratic participation within society, on a
country’s understanding of social policy, on its political culture. And for the strategically
so important arena of the social dialogue, it is not only a country’s political culture which
counts, but also the respective strength or weakness of the social partners: employers’ federations
and trade unions. In many countries the latter do not enjoy the freedom rights, the
degree of unionisation and the organisational and political competence required to enable
them fully to play their role within the social dialogue and defend the interests of their
working and job-seeking constituencies. The ILO and the system of international social
and labour standards thus represent an expression and mirror-image of global power relations
and are therefore greatly exposed to the strains of changing dynamic forces.
4 Cf. Norman Paech: Die sozialen, ökonomischen und kulturellen Menschenrechte im Rechtssystem
der internationalen Wirtschafts- und Handelsordnung, Eine Studie im Auftrag der Friedrich-Ebert-Stiftung,
Bonn 2003.
5 Millennium Summit Declaration, Paragraph 47: „We strongly support fair globalization and
resolve to make the goals of full and productive employment and decent work for all, including for
women and young people, a central objective of our relevant national and international policies as
well as national development strategies, including poverty reduction strategies, as part of our efforts
to achieve the Millennium Development Goals. These measures should also encompass the elimination
of the worst forms of child labour, as defi ned in the ILO Convention No. 182, and forced labour.
We also resolve to ensure full respect for the Fundamental Principles and Rights at Work.“
6 Commission of the European Communities: Promoting decent work for all - The EU contribution
to the implementation of the decent work agenda in the world, Brussels (COM) 249, 24 th May
2006.
425

426
I.2 Human rights
The three core tasks of the UN are laid out in the preamble to the UN Charter, dated 26 th
June 1945 and in force since 24 th October 1945. They read: “to save succeeding generations
from the scourge of war”, “to reaffi rm faith in fundamental human rights, in the dignity
and worth of the human person” and “to promote social progress and better standards
of life in larger freedom”. Former UN Secretary-General Kofi Annan, in offi ce until December
2006, endorsed these fundamental tasks for cooperation within the community of
states in his report “In larger freedom: towards development, security and human rights
for all” and modifi ed their interpretation to suit modern-day challenges. 7 Over a period
of approximately 60 years, an extremely complex and differentiated but almost impenetrably
intertwined body of human rights standards has been developed within the UN
system which, as the Offi ce of the High Commissioner for Human Rights itself admits, is
little known “outside academic circles, government departments and offi cials interacting
directly with the system and specialised lawyers and NGOs”, 8 and encompasses, alongside
the Universal Declaration of Human Rights (1948), seven “core” treaties on human rights:
the ‘’International Covenant on Economic, Social and Cultural Rights’’ (CESCR, 1966), the
‘’International Covenant on Civil and Political Rights’’ (ICCPR, 1966), the ‘’International
Convention on the Elimination of all Forms of Racial Discrimination’’ (ICERD, 1965), the
‘’Convention on the Elimination of all Forms of Discrimination Against Women’’ (CEDAW,
1979), the ‘’Convention Against Torture and Other Cruel, Inhuman or Degrading Treatment
or Punishment’’ (CAT, 1984), the ‘’Convention on the Rights of the Child’’ (CRC,
1989) and the ‘’International Convention on the Protection of the Rights of all Migrant
Workers and Members of Their Families’’ (ICRMW, 1990). In addition there is a plethora of
agreements, additional protocols and declarations, such as the Vienna Declaration (1993)
or the Millennium Declaration (2005), which further underscore the responsibility incumbent
on governments to ensure respect for human rights.
Human rights policy within the UN system is thus informed by two “pillars”. The fi rst
is the system whereby the UN Member States engage in negotiation within the Commission
on Human Rights (CoHR), established in 1946 by the Economic and Social Council
(ECOSOC) and now comprising 53 elected Member States, plus the Third Committee of
the UN General Assembly. The second is the treaty body of human rights pacts and conventions
to which states subscribe and commit themselves through national legal action
and ratifi cation. As a result of sustained criticism which reached as far up the structure as
the UN Secretary-General, in spring 2006 the Commission on Human Rights was replaced
by the Human Rights Council, a body composed of 47 Member States elected individually
on the basis of a regional allocation formula by a majority within the General Assembly.
Committees of experts, normally composed of 18 members, were set up as support and
monitoring bodies to oversee member states’ compliance with their reporting duties, to
submit comment thereon in the form of “fi nal observations”, and to issue “general comments”
on transposing the standards into national policies. Since 1947 the Commission on
7 United Nations A/59/2005; the chapter „Freedom from want“ seeks an answer to the challenges
of development; the chapter „Freedom from fear“ contains proposals for collective security, for the
prevention of terrorism and on nuclear, biological and chemical weapons; the chapter „Freedom to
live in dignity“ focuses on the rule of law, human rights and democracy; and the chapter „Strengthening
the United Nations“ contains a proposal for a new beginning with a Human Rights Council.
8 Concept Paper on the High Commissioner‘s Proposal for a Unifi ed Standing Treaty Body
– Report by the Secretariat, Geneva, 22 nd March 2006, HRI/MC/2006/2, p. 9.

Human Rights – and more recently its successor organisation, the Human Rights Council
– has been supported in its work by the Sub-Commission on the Promotion and Protection
of Human Rights. 9 It has likewise been supported by the treaty bodies of the second pillar
since their respective inception: the Committee on the Elimination of Racial Discrimination
(1969), the Human Rights Committee on civil and political rights (HRC, 1976), the Committee
on the Elimination of Discrimination against Women (CEDAW, 1980), the Committee
on Economic, Social and Cultural Rights (CESCR, 1985), the Committee Against Torture
Grafic 1
Council on
Human Rights
General Assembly of the UN
Economic and Social
Council
Special Rapporteurs Subcommission on the
Promotion and Protection
of Human Rights
Treaty Monitoring Bodies
Committee on Economic,
Social and Cultural Rights
Human Rights Committee
Committee against Torture
Committee on the Elemination
of Racial Discrimination
Committee on the Elimination
of Discrimination against Women
Committee on the Rights
of the Child
(CAT, 1987), the Committee on the Rights of the Child (CRC, 1991) and the Committee
on Migrant Workers (CMW, 2004). 10 The original Secretariat for Human Rights, set up in
New York in 1946, grew in importance to be succeeded fi rst by the Division for Human
Rights, then by the Centre for Human Rights (based in Geneva from 1974 on), and fi nally,
as of 1997, by the likewise Geneva-based Offi ce of the High Commissioner for Human
Rights (OHCHR). The post of High Commissioner for Human Rights had been created
previously, in December 1993, as an outcome of the UN World Conference on Human
Rights held in Vienna in 1993. The post has been held since July 2004 by Louise Arbour,
9 The mandate of the Sub-Commission on the Promotion and Protection of Human Rights was
extended by the Human Rights Council on 30 th June 2006 for “exceptionally 1 year” and is awaiting
review. A majority perceives a need for a “think tank” which in future could be called the Human
Rights Consultative Committee, but there is also resistance, e.g. from the USA and a number of
NGOs, to the “useless” Sub-Commission. See Appendix: Organisation chart.
10 Preparations are ongoing for two further monitoring committees as the Optional Protocol to the
Convention against Torture (OPCAT), which has not yet entered into force, envisages a 10-member Sub-
Committee on Prevention (SCP) for country monitoring visits, and the draft International Convention
for the Protection of All Persons from Enforced Disappearance likewise envisages the establishment of a
10-member monitoring committee.
427

a Canadian national. 11 Under the provisions of Article 71 of the UN Charter, NGOs may
also be invited to contribute to the negotiation processes within the UN system and have
actively done so, an engagement which has found endorsement in the form of their being
granted the right to speak and table motions within important bodies, but which has also
led time and again to political controversy on the matter of their participation rights and
the selection and coordination of NGO contributions.
As a value orientation, human rights lay the foundation of the democratic order and
thus enjoy priority over other organisational principles of statehood such as nation,
ethnicity, ideology, culture or even religion. Their primary function is a protective one,
shielding citizens from the state and its possible claim to absolute power. They serve to
constrain state hegemony and arbitrary rule by the state, to protect the individual as a
“human” being, and provide the foundation for enshrining in law the relationship between
state and citizen. They are the cornerstone for constitutionalising the international
order as determined in public and other international law, including the ILO standards
and the WTO rules. Human rights are thus highly political and correspondingly controversial.
States are called upon “to respect” human rights, “to protect” human rights and
to do everything in their power “to fulfi l” human rights. The debates on the UN’s 60-year
track record of policymaking in the fi eld of human rights focus on disputes about the universality
of these rights’ validity, their interdependence and status ranking, and particularly
the relationship between state sovereignty, under the terms of which human rights
fall within the “domestic competence” of states, and a common responsibility incumbent
on the community of states as a whole for their protection and implementation, from
which control functions and even – in extreme circumstances – the right to intervene
could be inferred. It was at precisely this testing hurdle that the 53-member Commission
on Human Rights established in 1946 ultimately failed, a body which for decades had
performed invaluable work in establishing and shaping the UN human rights system.
The Commission was accused of “politicisation”, “selectivity” and partisanship, and its
work was blocked and used to blockade the work of others to the point that fi nally UN
Secretary-General Kofi Annan, in March 2005 in his report on UN reform, “In Larger
Freedom”, pointed out that some Member States were using the Commission “not to
strengthen human rights but to protect themselves against criticism or to criticize others.”
He identifi ed a resulting “credibility defi cit” which “casts a shadow on the reputation
of the United Nations system as a whole,” and as a consequence proposed the
replacement of the discredited Commission on Human Rights by a smaller, permanent
Human Rights Council with members appointed by a two-thirds majority of the General
Assembly. Following controversial negotiations within the General Assembly during
2005, a compromise was reached allowing for the election of the new Human Rights
Council on 8 th May 2006 and commencement of its work on 19 th June 2006. Deviating
from the original intention, with a membership of 47 the new Human Rights Council is
almost as large as its predecessor; once again states with a dubious human rights record
have been elected as members; and, because the regional formula now applicable in the
General Assembly was likewise applied here, Africa and Asia together obtained a total
of 26 seats and thus – strangely to the surprise of western diplomats – a majority; and 17
11 Her predecessors in this post were: José Ayala Lasso (1994–1997), Mary Robinson (1997–
2002) and Sergio Vieira de Mello (2002–2003), who was killed in an attack while serving as UN
Special Representative in Iraq.
428

members are also members of the Organization of the Islamic Conference (OIC). 12 Provisions
were made to extend the length of the new organisation’s sessions to at least ten
weeks in three session blocks – a move which presumably diminishes the possibilities
for non-governmental organisations, especially those from poor countries, to participate
in the work of the body – and to convene special sessions in response to crises 13 ; and
fi nally there is the most important innovation, namely the introduction of the “Universal
Periodic Review” (UPR). At the same time, the General Assembly stressed that human
rights are “universal, indivisible, interconnected, interdependent and mutually reinforcing”
and that all states, even by taking account of “national and regional circumstances
and different historical, cultural and religious backgrounds” are “obliged, irrespective of
their political, economic and cultural systems, to promote and protect human rights and
fundamental freedoms”. The General Assembly also spoke out in favour of strengthening
the “human rights machinery” of the United Nations, strengthening the Offi ce of the
High Commissioner for Human Rights (in Geneva) and “doubling the ordinary budget
over the next fi ve years”.
One core element of UN human rights policy is standard setting, an activity which used
to be conducted mainly by the Commission on Human Rights and is now incumbent on
the Human Rights Council. Another core element is overseeing Member States’ compliance
with their obligation to report to the treaty bodies and their monitoring schemes, an
activity which entails drafting “fi nal observations” and providing assistance to Member
States in the form of “general comments” on wording and implementing the standards at
national level. Conventions, treaties, pacts and protocols are legally binding under public
international law and therefore qualify as “hard law” once they have been ratifi ed by a
Member State or that Member State has become a signatory state to the respective deed. By
contrast, declarations, principles, action plans and guidelines, which are increasingly being
backed up by an expanding body of international common law, are not legally binding and
qualify as “soft law” but nevertheless carry considerable legal and political clout. The 1948
Universal Declaration of Human Rights is a good case in point, likewise the Declaration
and Programme of Action of the World Conference on Human Rights held in Vienna in
1993. The standard-setting function of the UN human rights system is perceived in various
ways, with three basic positions emerging: some states want to confi ne the UN to standardsetting
per se and leave states to implement those standards as sovereign bodies; by contrast
others, and some NGOs too, consider that the bulk of the standard-setting work has
already been completed and that implementation should now be the UN’s main task; and
thirdly, a number of NGOs perceive a need for new and more comprehensive standards
in response to societal and political changes and challenges, though at the same time not
questioning the urgency of implementing the existing body of standards. 14
12 The OIC has 56 Member States; a list of OIC Member States which are also Member States
of the Human Rights Council is available on www.ohchr.org/english/bodies/hrcouncil/membership.htm.
13 The fi rst Special Session was held on 5 th and 6 th July on the “Human Rights Situation in Palestine”,
the second on 11 th August on Israel/Lebanon, the third on 15 th November on Israel/Palestine
and the fourth on 12 th and 13 th December on Darfur.
14 For example business and human rights, sexual orientation, the rights of indigenous peoples,
disappearances, disability, etc., cf. International Council for Human Rights Policy: Human
Rights Standards: Learning from Experience, A report co-published with the International Commission
of Jurists and the International Service for Human Rights, Geneva 2006, p. 3.
429

The UN’s human rights treaty body system imposes on states legal obligations to promote
and protect human rights, compliance with which is subject to monitoring by the
committees of experts of the respective treaty bodies. States are obliged to submit periodic
reports to the seven treaty bodies which, through an “objective” procedure, review the human
rights situation and supply authoritative assistance for implementation at national
level in their “fi nal observations”. Five of these committees of experts have inferred from
their respective treaties the power to deal with individual petitions, four are entitled to deal
with complaints from states against other states, and two have the power to investigate
grave and systematic violations. However, the reporting and monitoring procedure of the
treaty bodies is imperfect in many respects. Many states respond to their reporting obligations
inadequately, respond defensively or fail to submit their reports on time. 15 The committees,
for their part, incur delays in processing the reports, backlogs build up, and there
is no systematic follow-up. A lack of coordination on reporting obligations between the various
expert committees and a partial overlap in terms of their respective competences have
resulted in duplication of work and a need for parallel data input which threaten to overstretch
the patience of even the most cooperative states. Proceeding from the observation
that “the system also faces challenges because many States accept the human rights treaty
system on a formal level, but do not engage with it, or do so in a superfi cial way, either as a
result of lack of capacity or lack of political will. Some States fail to submit reports required
by the treaties, and most submit them after considerable delay”, the Offi ce of the High
Commissioner for Human Rights has proposed the setting up of a “unifi ed standing treaty
body” which would be responsible for monitoring all international human rights obligations,
simplify access and help rectify the lack of visibility and authority, 16 combined with
a corresponding restructuring of the reporting procedures. Variations of this proposal are
currently being hotly debated – with broad resistance emerging primarily from the “African
and Asian Group”. The main bones of contention are powers, composition (as a standing
expert body?), how the “specifi city” of the individual treaties would be taken into account
and the structure of the reporting. 17 This debate is extremely closely interlinked with the
decision on the nature of the Universal Periodic Review (UPR), the backbone of the new
Human Rights Council. After four informal consultations within the Council, a working
group has been set up to take the matter further, but this working group is unlikely to be
swift to reach agreement. 18 The course of the discussion is staked out mainly by the refusal
15 „Figures from February 2006 indicate that 70 per cent of total number of state party reports
due have been submitted … Of the initial reports that are due, 30 per cent have not been submitted.
As of February 2006, only eight of the 194 States that are party to one or more of the seven treaties
are up to date with their reports, with the remaining 186 States owing 1,442 reports to the treaty
bodies. The committees have little real power to enforce States to comply with the procedures, but
at the same time, with their current working methods, they could not accommodate full compliance
by State parties reporting obligations“, OHCHR, HRI/MC/2006/2, p. 7.
16 Concept Paper on the High Commissioner‘s Proposal for a Unifi ed Standing Treaty Body,
HRI/MC/2006/2, pp. 7, 9.
17 Report of a Brainstorming Meeting on Reform of the Human Rights Treaty Body System,
Triesenberg, Liechtenstein, 14–16 July 2006; A/58/123.
18 See: Friedrich-Ebert-Stiftung (FES)/International Service for Human Rights (ISHR): A New
Chapter For Human Rights – A handbook on issues of transformation from the Commission on
Human Rights to the Human Rights Council, Geneva 2006, Chapter 6, (pp. 73–86); cf. United Nations,
Press Release Human Rights Council Discusses Modalities of its Universal Periodic Review
Mechanism (HR/HRC/06/55).
430

of a large group of states to make the reporting more stringent and allow it to include inputs
from experts and NGOs. The same confl ict lines are likewise evident in the debate on
the review of the “special procedures” mandates. 19 These are procedures whereby compliance
with human rights standards is reviewed by special rapporteurs, special representatives
(of the UN Secretary-General), independent experts or even by working groups which
are convened to address specifi c aspects of human rights or draw up country evaluations
and, within the context of their mandate, may also undertake fact-fi nding missions to individual
countries – for which consent is frequently denied. The setting up of a working
group to review these mandates had been an outcome of the restructuring of the working
procedures for the Human Rights Council. Whereas in the case of the thematic mandates, 20
despite all the controversy the work style still provides evidence of professional objectivity,
in that of the country mandates 21 the atmosphere is “literally hostile”. “Many states from
all regional groupings described the choice of countries for evaluation random. A large
number of states fl atly refuses to contemplate any form of country evaluation beyond the
framework of the future Universal Periodic Review (UPR) mechanism.” 22 An infl uential
group of states is in favour of conducting country evaluations only on the basis of the nonpublic
1503 procedure, 23 which cannot be directly accessed by NGOs. The 1503 procedure
is the oldest complaints procedure within the system 24 and is due for review under the
terms of General Assembly Resolution 60/251 on the establishment of the Human Rights
Council and the associated restructuring of powers and procedures. Although the initial
sessions of the Human Rights Council have shown evidence of a desire for fl exibility and
consensus, it is as yet unclear whether the Council will be able to fi nd practicable solutions
to the upcoming highly political issue of revamping its rules of procedure, including those
on the contentious matters of NGO participation, the UPR, the special procedures and the
1503 complaints procedure, or whether, by contrast and refl ecting its past, it will manoeuvre
itself into a dead end. Some observers believe it is already in that dead end.
Setting aside the “action with respect to threats to the peace, breaches of the peace, and
acts of aggression” which the Security Council may take under the provisions of Chapter
VII of the UN Charter, the international organisations within the UN system lack enforcement
powers and capabilities. In the social rights fi eld, apart from the ILO’s own procedures
and recourse to the International Court of Justice, there is no international judicial,
let alone policing body for enforcing standards and compliance with obligations. The hu-
19 Cf. FES/ISHR 2006, Chapter 3 (pp. 33–50).
20 Adequate Housing, African Descent, Arbitrary Detention, Sale of Children, Education, Enforced
or Involuntary Disappearances, Extrajudicial, Summary or Arbitrary Executions, Extreme
Poverty, Right to Food, Freedom of Opinion and Expression, Freedom of Religion or Belief, Health,
Human Rights Defenders, Independence of Judges and Lawyers, Indigenous People, Internally
Displaced Persons, Mercenaries, Migrants, Minority Issues, Racism, Human Rights and International
Solidarity, Effects of Economic Reform Policy, Human Rights while countering Terrorism,
Torture, Toxic and Dangerous Products and Wastes, Traffi cking in Persons, Transnational Corporations,
Violence against Women.
21 Belarus, Burundi, Cambodia, Cuba, DR Congo, Haiti, Liberia, Myanmar, Palestine, Somalia,
Sudan Uzbekistan (Lists: OHCHR Webpage).
22 Theodor Rathgeber, Forum Menschenrechte, 2. Sitzungsperiode des UN-Menschenrechtsrates,
Bericht, Schlussfolgerungen und Empfehlungen, S. 3.
23 Countries being processed under this procedure include Iran and Usbekistan; Kirgistan is
being transferred to the public procedure.
24 FES/ISHR 2006, 67 ff.
431

man rights system itself is confi gured largely in the image of the political will of the Member
States, some of which react extremely sensitively to public “blaming and shaming” and
do everything in their power to avoid it. Blockading alliances and political and economic
bartering are just some of the instruments customarily deployed, and they are effective.
Here, a balance shift has occurred which operates to the advantage of countries which are
inclined to indulge in blocking and delaying tactics but which are also undoubtedly not
mistaken when they accuse western countries of one-sidedness and turning a blind eye.
Whereas in the days of the Cold War it was true at the ILO that certain standards could be
pushed through by a few western governments and union representatives backed up by
the latter’s eastern counterparts, thereby forcing the rival system to compromise, today the
disputes are more open and fi ercer and the weight of the employer side is stronger. And
whereas back then the confl ict lines within the human rights system ran more between
the advocates of rights of political freedom (the West) and those of economic and social
rights (the East and parts of the South), here too a new constellation has emerged. The
“right to development” 25 – recognised since 1986 and further strengthened by the 1993
Vienna Conference on Human Rights – and the so-called “social pact” 26 are issues which
are clearly high on the agenda of many poor and newly industrialising countries, in some
cases so high that they are calling for a “right to international solidarity”. 27 Whereas the
ILO system of standards makes explicit reference to the UN human rights instruments and
whereas political freedom rights are seen as having constitutive signifi cance for freedom of
association, there is a clear tendency among the Member States as a whole – the UN has
192 Member States, the ILO 178 (and the WTO 150) – to attach less importance to political
rights and freedoms. Hardly a single human rights standard – from women’s rights or the
ban on torture up to the issue of sexual orientation – is uncontroversial, and the controversy
sometimes brings about some unexpected alliances. Moreover, a growing number of
states – not only Islamic countries (OIC members), but also the USA and some countries
with a majority community espousing a strictly devout form of Catholicism – are bent on
reassessing the importance of the issue of religious discrimination or freedom of religion
and are thereby undermining the concept of the universality, equal status and interconnectedness
of all human rights. The outcome of the confl ict is open!
The establishment of the “International Criminal Court” (ICC) on 17 th July 1998 on the
basis of the Statute of Rome, which entered into force on 1 st July 2002 and to which, on
1 st November 2006, 102 states were party (though not the USA), marked the arrival of a
judicial body with a high human rights relevance, serving as it does as the court of “last
resort” in the prosecution of “persons accused of the most serious crimes of international
concern, namely genocide, crimes against humanity and war crimes.” 28
Regional organisations have developed their own human rights instruments which
fall beyond the scope of this paper. Europe in particular has some well honed mechanisms,
but to some extent these operate in parallel to international mechanisms or with
25 th General Assembly Resolution 41/128 of 4 December 1986; cf. Felix Kirchmeier: The Right
to Development – where do we stand? FES Geneva, Dialogue on Globalization – Occasional Papers
No. 23/July 2006.
26 th
Abbreviation for the International Covenant on Economic, Social and Cultural Rights of 16
December 1966; in force since 1976.
27 E/CN.4/Sub.2/2004/43 (Working Group); E/CN.4/2005/L.71 (Mandate); C/CN.4/2006/96
(Report).
28 Elements of Crimes, ICC-ASP/1/3.
432

a certain functional overlap. A case in point is the Strasbourg-based Council of Europe,
with 46 Member States, which since 1999 has had its own Commissioner for Human
Rights and an effi cient monitoring procedure in place and whose European Court of Justice,
established in 1959, is increasingly being invoked as a supranational legal authority.
The legal references for such judicial recourse are the European Convention for the Protection
of Human Rights and Fundamental Freedoms (1950/1953), the European Social
Charter (1961, revised 1996), the European Convention for the Prevention of Torture and
Inhuman or Degrading Treatment or Punishment, and the Framework Convention for
the Protection of National Minorities. In addition, within the framework of the European
Union (EU), such regional initiatives include the three pillars of the EC/EU treaties, the
common foreign and security policy and police and judicial cooperation. Through its
Charter of Fundamental Rights, the EU has endowed itself with a common reading on
rights which has been adopted by the European Council and the European Parliament
(7 th December 2000). Since this process of Europeanisation, the necessarily closer coordination
of European Union positions within the UN human rights bodies has unintentionally
led to stronger “regionalisation” and “politicization” of policymaking in the
fi eld of human rights. And fi nally within this regional machinery category, there are the
mechanisms of the Organization for Security and Co-operation in Europe (OSCE), which
curtailed the principle of non-intervention in the internal affairs of other states in matters
of human rights relevance back in 1991. Its principal rights and freedoms bodies are
the Offi ce for Democratic Institutions and Human Rights (ODHIR, Warsaw), the Confl ict
Prevention Centre (CPC, Vienna), and the High Commissioner on National Minorities
(HCNM, The Hague). A further recent addition to the EU machinery is the Vienna-based
Agency for Fundamental Rights, which commenced its work on 1 st March 2007. 29 All this
activity undisputedly raises the problem of ensuring adequate policy coordination and
coherence and harbours the danger that new standards will fall short of the already established
standards in terms of their stringency.
II. GERMANY’S POLICY – “LAND OF THE GOOD”: RESPECTED, ACTIVE, BUT
SHORT ON PROFILE?
Having lost World War I, Germany was not a founding member of the ILO when it
was set up in 1919; never the less a decision of the fi rst International Labour Conference
allowed Germany to accede later that year. In 1933, after Hitler’s seizure of power, Germany
left the organisation, but was allowed to rejoin as early as 1951. Since 1954, by dint
of its economic strength, Germany has held one of the 10 permanent seats on the Governing
Body. Ranking behind only the USA and Japan, Germany is the third largest contributor
to the ILO, its contribution currently amounting to CHF 32.2 million or 8.7 per
cent of the organisation’s ordinary budget. Further funds are made available for technical
cooperation programmes or the ILO Programme for the Elimination of Child Labour.
Germany has ratifi ed 77 of the 185 conventions, including all the core or human rights
conventions. This score puts Germany in the top league. According to the ILO branch
offi ce in Berlin, Germany perceives itself as being not affected by 12 conventions, 34 conventions
have been revised and 44 older conventions contain obsolete provisions and are
29 Cf. http://www.fes.de/handbuchmenschenrechte
433

therefore no longer ratifi able. The statement: „alongside these there are of course (a few)
conventions which […] cannot be ratifi ed for substantive reasons, for reasons of legal
system compatibility or because of their terminological vagueness“ could well constitute
reason enough to raise eyebrows in some quarters. The ILO commands general support
in Germany but is a little known organisation. Seen through German eyes, Germany‘s
social standards are more stringent than the universal ILO standards, but the subjects
of some conventions are controversial (e.g. public offi cials‘ right to strike, the ban on
public service employment for certain individuals), and there are others (such as the
Convention on Home Work), which Germany refuses to endorse. In line with ILO procedures,
a „social dialogue“ is conducted in the run-up to ILO meetings and it does indeed
address matters of substance. But frequently this is perceived more as a „bureaucratic
procedure“, the political routine of going through the motions without any real sense of
initiative or long-term strategy.
Germany has been a member of the United Nations (UN) since 1973 and over the years
has become a party to all important UN human rights conventions. Since 1979 without
interruption, Germany has been a member of the Commission on Human Rights. The
fact that in the election to the newly established Human Rights Council for the coming
three-year period held on 9 th May 2006 in the UN General Assembly, Germany obtained
154 votes and thus a stronger endorsement than any other country in the region can be
interpreted as acknowledgement of its international ranking and at the same time as an
obligation to take the lead.
Human rights have become a “central category of politics”. At the beginning of its
14 th parliamentary term in autumn 1998, the Deutscher Bundestag (German Federal Parliament)
upgraded the former Sub-committee of the Foreign Affairs Committee and renamed
it the “Committee on Human Rights and Humanitarian Aid”. The 2002 Coalition
Agreement states: “The basic tenets for [the Government’s] foreign policy are respect
for public international law, taking a stand on human rights, a readiness to engage in
dialogue, crisis prevention, renunciation of the use of force and confi dence-building […].
The Government attaches fundamental importance to respect for human rights worldwide.
The effort to safeguard international peace can be successful only if human rights
are protected and implemented […].” The current Coalition Agreement between the two
major parties forming the “Grand Coalition” emphasises: “Our policy on human rights is
an important component of our policy to promote peace and security. Systematic violations
of human rights can also pose a threat to peace and international security. Human
rights are indivisible. Our foreign and development policies will not fail to respond when
democracy, freedom, the rule of law and minority rights are in danger.”
A characteristic feature here is the perception of human rights policy as being part of
foreign policy, or even also of security and development policy. As a logical consequence
of that perception, the Commissioner of the Federal Government for Human Rights Policy
and Humanitarian Aid at the Federal Foreign Offi ce, an offi cial charged with helping
inform human rights policy in foreign relations, has his offi ce precisely where the
title suggests. The Commissioner of the Federal Government for Human Rights Issues
at the Federal Ministry of Justice is the plenipotentiary of the Federal Government at the
European Court of Human Rights in Strasbourg – and enjoys an even lower public profi
le. This Commissioner also represents the Federal Government in matters falling under
ECOSOC Resolution 1503, takes care of the periodical state reports and sits on the intergovernmental
committees of the Council of Europe to advance the cause of protecting
434

human rights. There is no or only very limited provision for domestic scrutiny, though
a not inconsiderable role in this respect is played by two institutions: the state-funded,
Berlin-based “Deutsches Institut für Menschenrechte” (German Institute for Human
Rights), established in March 2001 in pursuance of a recommendation of the Bundestag,
and the “Forum Menschenrechte” (Human Rights Forum), a forum for over 40 German
non-governmental organisations set up in 1994 in the wake of the UN Conference on
Human Rights in Vienna. “The Federal Government attaches major signifi cance to cooperation
with non-governmental organisations.” 30 None the less, on 4 th April 2001 the Bundestag
urged the Federal Government to give domestic policy issues more prominence
in its human rights reports than has hitherto been the case. However, a national human
rights commission along the lines of those already existing in many European and extra-
European countries which could operate as an independent advisory body neither exists
in Germany nor is establishing such a body at present under consideration.
Germany’s human rights policy is increasingly being pursued qua integration into
the “dual” European structures, namely those of the Council of Europe and those of the
European Union with their respective modus operandi – which, unlike the international
procedures of the UN system, can only be outlined here. The necessary coordination of
human rights policy within the EU and the furtherance of that coordinated policy by the
respective EU presidency on the international stage logically means that, to the regret of
Germany’s partners, there is now very little evidence of a specifi cally German position
and that emerging in its stead is the not always satisfying lowest common denominator
agreed on by the Europe of 27.
III. MULTILATERAL AND NATIONAL SCENARIOS – HUMAN AND SOCIAL RIGHTS
UNDER THREAT
In the fi eld of international human rights and social policy, dynamic forces operating
at global, international and national level are today interacting in a manner that makes
projecting any credible outline of clear alternative scenarios very diffi cult. Assuming that
a country’s foreign policy is primarily a function of domestic policy, it is true to say that it
is subject to constant redefi nition to take account not only of that country’s own domestic
issues but also of the domestic issues of other countries. The signals which a country’s
foreign policy sends out to the international community therefore tend to vary in the
extreme. Consequently, it could be useful to examine the relationship between certain
international factors and national developments within Germany.
III.1 Scenario 1 – Credibility crisis and a power shift: competition, values and interests
Crisis of multilateralism
However much human rights and international social policy refl ects specifi c “cultures”,
this fi eld of policymaking is not pursued in its own, totally compartmentalised
space. It is an integral part of multilateral processes taking place within the various
institutions and action fora of the UN, the IMF, the World Bank and the World Trade
Organization (WTO) and is to some extent infl uenced by these processes. Unkept prom-
30 Core report Federal Republic of Germany for state reports on the human rights conventions
of the United Nations.
435

ises and crises in negotiations in these institutions and fora, such as the current crisis
at the WTO 31 , have repercussions on the human rights agenda. Countries belonging to
the “poor world” which fi nd themselves constantly confronted with new cautionings
and demands tend to react with a policy of blockading whatever progress they can. Human
rights negotiations are thus part of the struggle for a more equitable global order
and therefore cannot be advanced without a new approach to global governance and a
well-functioning multilateralism. Mutual respect and efforts to reconcile confl icting interests
are the basic prerequisites here; arrogant attempts to impose diktats unilaterally
are counterproductive. The failure to date to reform the UN, together with the lack of
coordination and coherence in international governance structures 32 and the prevalence
of unilateral power politics (keywords here being intervention in Iraq and Guantanamo
Bay), are doing nothing but add to the general strain – and this at a time when the need
for global governance and effi cient multilateralism is becoming ever more acute. Human
rights and democratisation policies have always been and remain an expression of
constellations of foreign policy interests – and this remains the case even after the end
of the East-West confl ict. A re-evaluation of the status of these policies and a move up
the political agenda will be forthcoming only when such an initiative is in the interest of
the new powers and these powers are accorded their rightful place and an appropriately
participatory role within the multilateral system.
Power shifts, new powers
Global power relationships are changing, not only in terms of relative economic
strength but also in terms of the political clout wielded by the respective players. New
economic powers such as China and India, energy-rich and commodity-rich producers
such as Russia, and also Brazil and Iran are calling the existing “hegemony” into question
and often likewise the proclaimed – though not always consistently enforced – values
of democracy and human rights. Power and interest politics is becoming both a feasible
and attractive option for new players. The international system is thus becoming more
multipolar, and a characteristic feature here is the return of superpower politics. The
West’s ability to shape the international agenda and constantly infl uence international
politics is in decline. 33 A credibility gap for which western states are responsible is having
its repercussions on them. Globalisation includes a cultural dimension which extends
to things such as adopting or rejecting certain consumption patterns or trends in music
style. Because cultural and religious considerations are continuing to acquire weight in
the debate and are becoming a prism for interpreting and responding to confl ict, they
are now questioning the universality of human rights and social standards. Conspicuous
here is the escalating confrontation between Muslim and western societies which, according
to a High-Level Group appointed by the UN Secretary-General, is not “religious”
31 Suspension of the World Trade Round – Multilateralism, Global Governance, and Development
Policy in Crisis, Dialogue on Globalization, Briefi ng Paper, FES Geneva 2006, http//www.
fes-globalization.org/publications/FES_BP_14_Adam_WTO_Suspension.pdf.
32 See UN Secretary General’s High-Level Panel on UN System-wide Coherence in the Areas of
Development, Humanitarian Assistance, and the Environment, chaired by Prime Minister Shaukat
Aziz (Pakistan), Luisa Dias Diogo (Mozambique), Jens Stoltenberg (Norway), “Delivering as One”,
UN New York, November 2006.
33 See: The New Global Puzzle – What World for the EU in 2025? Directed by Nicole Gnesotto
and Giovanni Grevi, Institute for Security Studies, Paris 2006, esp. p. 196 ff., 193.
436

ut “political” in essence and for which, alongside the military intervention of the West
in countries such as Iraq and Afghanistan, the “Arab-Israeli confl ict is the critical symbol
of growing alienation.” 34 It has to be assumed in this context that the increasing scale of
international capital investments in Germany and elsewhere in Europe originating from
China, Russia and various Arab states will have an impact on the social system and labour
and social standards in Germany and Europe which will in turn make safeguarding
universal standards via the ILO all the more necessary.
Global competition for jobs
Given this backdrop, it is clear that the dynamics of global economic performance
and the redistribution of opportunities for participating in economic and social
progress are exerting a decisive infl uence on the making of human rights and social
policy. Venturing global predictions is diffi cult here, but there can be no doubt that
global competition for jobs will become fi ercer and exert further pressure on wages
and incomes in the future. In the next ten years, more than one billion young people
who are today between fi ve and 15 years of age will join the ranks of the labour force.
Each year, that labour force will swell by about 50 million people – 97 per cent thereof
living in developing countries – a number far in excess of the number of people leaving
the labour force. More than 192 million people or 6 per cent of the global labour
force are registered as unemployed, and over half of these are under 24 years of age. 35
The ILO’s Global Employment Trend for Youth (2006) puts the fi gure for unemployed
young people at 85 million, with a further 300 million underemployed people counting
as belonging to the “working poor” earning less than $2 a day. This ILO institution
considers that at least 400 million new and better paid jobs are needed to address this
problem. The ILO World Employment Report 2004–2005 puts the number of working
people living below the poverty line (one US$ per day) at 550 million and cites a total of
1.39 billion working people who are not able to lift themselves and their families above
the poverty line of two US$ per day. But the 2.8 billion people who were employed
in 2003 represented a higher employment fi gure than ever before. 36 Since 1990, 1.47
billion economically active people from the formerly closed economies of the former
Soviet Union and its allies and from developing countries such as China and India have
doubled the size of the global labour force – an indication of the emergence of a global
labour market and correspondingly fi ercer competition for work. Poverty is the driving
force behind this fi ercer competition for work which is in turn leading to inequality in
the distribution of income and wealth between countries and regions of the world, and
34 Report of the High-level Group „Alliance of Civilizations“, 13. November 2006 (www.unaoc.
org), UN Press Release; it is telling that three of the four special sessions of the UN Human Rights
Council convened to date at the request mainly of Islamic countries with support from other regions
have dealt with human rights issues in this context and assembled majorities for decisions
which were rejected by western states as one-sided.
35 th Changing Patterns in the World of Work, International Labour Conference 95 Session
2006, ILO Geneva, viii; cf. Working Out of Poverty, International Labour Conference, 91st Session
2003, ILO Geneva, p. 83; cf. World Commission for the Social Dimension of Globalisation: A Fair
Globalization, Creating Opportunities for All, ILO Geneva, 2004, p. 44.
36 World Employment Report 2004–2005 – Employment, Productivity and Poverty Reduction,
ILO Geneva, 2004, p. 24.
437

increasingly also within individual countries. 37 Moreover, competition for work is not
confi ned merely to unskilled labour but, because of the advances made in education,
training and productivity, is increasingly extending to higher skilled employment and
middle-income groups. In the medium term, the assumption has to be one of further
pressure on wages, but in the longer term it can be assumed that there will be a relative
rapprochement of incomes, at least at the higher skill level, a prospect which can only
be considered desirable from the development viewpoint. On the whole, Germany is
still a benefi ciary of the globalisation process and, in terms of competitiveness, remains
in a sound position – as evidenced by its substantial foreign trade surplus inasmuch as
the latter can also be interpreted as the “importing of work”.
On a wider stage, this trend has signifi cant political implications. Given the inadequate
supply of new jobs, countries are more inclined to engage in a “tug-of-war” for
those which are available. The demand for equity in the operating mechanisms of the
global market and for fair rules to govern globalisation is growing louder. Latent protectionist
tendencies are rising to the surface and the dynamics of liberalisation of trade and
capital movements are losing momentum. Normal business decisions on, say, outsourcing,
relocating production or investing abroad are increasingly being criticised as generating
employment abroad. The call for stricter control of immigration is acquiring a more
pronounced xenophobic subtext and being voiced more often. Elections are being won or
lost on the strength of the single issue of “more and better jobs”, while confi dence in the
ability of governments, irrespective of their ideological leaning, to keep their promises is
waning. Various forms of passive and active violence are on the rise and are reducing the
space available for dialogue, confl ict resolution and consensus-building.
In future, the global economic discourse will be decisively infl uenced by employment
considerations and will take on board the correlation between economic growth and
trade liberalisation. And there are indications that this will have a substantial impact
on future WTO negotiations and even more so on negotiating agreements on trade and
cooperation at the bilateral and regional levels.
III.2 Scenario 2 – In a double grip: ageing fast and heading towards the right and into
social crisis?
Demographics and immigration
That Germany is ageing and shrinking is now accepted as a truism. The combined
effect of longer life expectancy and lower birth fi gures is that the average age of the German
population is continually rising. The population of employable age will therefore
diminish considerably, with implications for life work time, the health care system and
pensions. 38 That this must bring about reforms in the social welfare system is likewise
foreseeable, but no such reforms could offer an immediate solution to the problem. Immigration
could mitigate the downward population trend but not bring it to a halt. Immigration
fi gures would have to rise to over 300,000 people per year until 2020 to do that, but
even though this would result in a certain lowering of the average age of the population,
it would not solve the problem as such because immigrants, with their sharply declining
employment rate since the end of the 1980s, have become a drain on the social insurance
37 Cf. Note 35: Changing Patterns, pp. 4, 8.
38 Cf. Statistisches Bundesamt Deutschland „Bevölkerung Deutschlands bis 2050“. 11. Koordinierte
Bevölkerungsvorausberechnung, Wiesbaden 2006.
438

funds rather than a source of additional social funding. 39 Germany is integrating its immigrants
into its social welfare schemes but not into its economy and society. Immigration
is unlikely to be able to make a positive contribution towards solving the problem
in the absence of a carefully formulated immigration policy which selects people for and
integrates people into the labour market. Immigration will likewise be inadequate to the
task of halting the trend, given its scale, as long as the existing system of social welfare
benefi ts remains in place and no action is taken to remove the disincentives which are
such a temptation to both the inbound and the resident population. The key requirements
here are selection and differentiation and thus “discrimination”. Without these
key policy drivers, uncontrolled and rampant immigration is likely to be inevitable – with
massive implications for the economic and social system and for politics.
Xenophobia is already a persistently strong groundswell in Germany. One belief shared
by 43.8 per cent of Germans living in the east of the country and 35.2 per cent of those
living in the west is that foreigners come to Germany only in order to milk the country’s
social welfare schemes. “The likewise racist perception of being overwhelmed by foreigners
is shared by almost 40 per cent of the population nationwide.” 40 This extreme right-wing,
xenophobic view is particularly prevalent within a segment of society which, as a study
commissioned by the Friedrich-Ebert-Stiftung estimates, accounts for 8 per cent of the population
and refers to as the “left-behind precariat”, namely the segment of society which
has been personally exposed to social exclusion and degradation, which has the highest
unemployment rate and which has a predominant tendency to be male and east German. 41
The left-behind precariat prototype resembles the extreme-right voter prototype, though it
should be recalled that xenophobia must be seen to qualify as a “middleof-society” problem
if a total of 26.7 per cent of Germans are found to hold xenophobic views and a further
segment concur at least in part with such views. “Xenophobia is the slippery slope into a
closed, extreme-right-wing world view.” The backdrop here is not so much any direct experience
of competing with immigrants for jobs and social status but rather a perception and
sense of being personally confronted with a confl ict. If, in addition, the demographic composition
of the population is seen as being an increasingly decisive factor of importance
here and poorly skilled young males in particular experience rejection both on the labour
market and with regard to partnerships, 42 it has to be assumed that, with persisting uncontrolled
immigration and in the absence of reform to the social welfare system, this trend
towards xenophobia will become more pronounced and ultimately lead to open confl ict.
“The high prevalence of xenophobia in Germany calls for political action.” 43 Additional
pressure can also be expected from the intergenerational constellation and the erosion, or
at least the questioning, of the notion of solidarity based on the assumption of reciprocity:
39 GEO Magazin Nr. 05/04 „Deutschland 2020“ – Demographie: Was Deutschland erwartet.
www.geo.de/GEO/kultur/gesellschaft/2235.html
40 Study commissioned by the Friedrich-Ebert-Stiftung: Oliver Decker/Elmar Brähler in association
with Norman Geissler: „Vom Rand zur Mitte – Rechtsextreme Einstellungen und ihre Einfl
ussfaktoren in Deutschland“, Berlin 2006, S. 38 f.
41 Study commissioned by the Friedrich-Ebert-Stiftung, Rita Müller-Hilmer, TNS Infratest:
„Gesellschaft im Reformprozess“ i.E. 2006; FES Presse, Kommunikation und Grundsatzfragen;
SPIEGEL ONLINE 18. Oktober 2006, http://www.spiegel.de/politik/deutschland/0,1518
42 Frank Schirrmacher: „Nackte Äste – Die neue soziale Basis der NPD ist eine demographische“,
in: FAZ, 21. September 2006.
43 Cf. Note 40: „Vom Rand zur Mitte“, S. 167.
439

“The more Germany becomes a country of immigration and the more its citizens lose their
sense of national identity, the faster the solidarity base underpinning the social insurance
system will be eroded because that solidarity base is predicated on a national rather than a
religious sense of community.” 44
Implications for human rights and politics
Given the situation outlined in the foregoing, pressure is being exerted on human rights
and social standards from various quarters. While fi ercer competition in both the global
economy and the global labour market is infl uencing the distribution confl ict at the national
level, the demographic trend suggests that there is a dynamic operating within sections
of the older population, within the left-behind precariat and also within the “middle” of
society which will not have a positive effect in terms of promoting human rights and social
standards. More importantly, integrating a growing Muslim community into mainstream
society will become an ever greater challenge, not only in Germany but also throughout
the rest of Europe and in the USA. 45 The response to globalisation has to be far-reaching
reforms to revamp the social security system, the labour market and the education and
training system. “The challenge will be to foster economic competitiveness without endangering
social cohesion. The outcome will be decisive both for Europe’s internal stability and
its capacity to generate the necessary resources to play a serious role in world affairs.” 46 To
date, the focus has been primarily on defensive measures to counter illegal immigration
and protect national security interests; a scaling back of social rights and an erosion of
human rights and refugee rights are accepted as part of the price payable for limiting uncontrolled
and undesired immigration. 47 What is needed is a migration policy which takes
account of future economic and social needs and offers immigrants an accepted place in
society. This entails striking the right balance: getting the selection right and getting the acceptance
right. The new leave-to-stay arrangement and a greater willingness to open up the
labour market to immigrants are steps in the right direction. The response to xenophobia
and right-wing challengers of human rights must neither be “populistic accommodation”
nor can it be confi ned to regulatory measures (“not policing, but policy”). The response has
to “mature into a substantive debate. It has to be politicised.” 48
The same applies to the application of agreed human rights provisions to the national
and the immigrant population. The appropriate response to the challenging of
statutory and human rights standards by the proponents of Muslim tradition should not
be wheeling out the corresponding Christian positions but purely and simply the enunciation
of a clearly stated human rights policy. The universal human rights conventions
– the majority of which include Islamic states on their list of (at least formal) signatories
– offer an irrefutable point of reference in this respect. A special need for action will be
44 Peter Koslowski: „ Das Ende der Sozialen Marktwirtschaft – Die Zeiten nationaler Solidarität
sind vorbei“, in: FAZ, 11. November 2006, S. 15.
45 Cf. Note 34: Alliance of Civilizations, section 6.20., p. 30.
46 Cf. Note 33: „The New Global Puzzle“, p. 203; cf. Jaques Delors/Poul Nyrup Rasmussen:
„Für ein neues soziales Europa“, in: FAZ, 16. November 2006, S. 10
47 Daniela Kietz/Roderick Parkes, Die deutsche EU-Ratspräsidentschaft: Möglichkeiten
und Grenzen einer ausgewogenen Inneren Sicher-heits- und Migrationspolitik, Manuskript,
Stiftung Wissenschaft und Politik, Forschungsgruppe EU-Integration, 2006.
48 Cf. Note 40: „Vom Rand zur Mitte“, S. 166.
440

incumbent on states here in the form of promoting human rights education, protecting
human rights via the existing body of laws and, more importantly, ensuring balance and
tolerance in the dispute between different human rights postulates. As with the adage
that freedom rights run up against their limits when they infringe the rights of others,
freedom of religion needs to be balanced against freedom of expression and the nondiscrimination
principle against ownership rights. Enlightenment-inspired criticism of
religion and rejection of belief in God and religion must both be possible in the same way
as a personal rejection of homosexual orientations on the strength of religious views has
to be possible, but so too must it be possible to protect those concerned from vilifi cation,
discrimination and violence. The protection afforded by the state for the recognition,
defence and exercise of human rights has to be ubiquitous.
The arguments and characteristic positions currently informing the human rights discussion
are thus increasingly impinging upon the territory of home affairs policy and the
controversy concerning value systems and the legal system underpinning the democratic
order. The way in which this home affairs confl ict is solved will have a considerable infl uence
on Germany’s foreign policy and its international human rights policy. At a time
when readiness within the German population to intervene abroad on human rights
grounds is already diminishing, the immigrant community within the country will judge
the German position on the basis of broader criteria and against the shadow cast by their
country of origin and set stricter limits. That the demographic changes will have an infl
uence on military capabilities is also likely given the diminishing size of the upcoming
youth cohorts and the fact that in some urban areas youngsters from immigrant communities
already account for the majority fraction of these age cohorts.
Integration entails more than learning the language and becoming involved in working
life and society; it also entails participation in democracy. This in turn means not
only acceptance of democratic values but also participation in democratic processes and
procedures, particularly having the right to vote in elections and to stand for election.
In view of the visible voter swing towards left-wing and right-wing populist and even
extremist parties, for the centrist democratic parties their performance on integration
represents an enormous challenge, not least because integration impinges upon central
political issues against which other parties in a pluralistic competitive democracy can
sharpen their profi le. And it cannot be precluded that immigrants, especially those with
an Islamic background, will strive to equip themselves with their own political representation
by setting up their own parties, possibly modelled on the Turkish AKP, or even
more radical forms of Islamic political expression. How politicians and the general public
will handle such a development is a matter of major importance. On the one hand, there
is no guarantee that this form of direct political representation will facilitate extensive
political and social integration, but on the other hand there is no guarantee that it would
not result in massive counter-reactions and spiralling confrontation. But it should be
remembered that the only people who can be fi tted into a democracy are those for whom
a place within that democracy is made available.
A further issue for human rights policy, one which has hitherto largely been considered
a taboo subject, is the fact that demographic change is generating a rapidly growing
number of very old people suffering from dementia and in need of long-term nursing care.
The question here is to what extent society, plus its statute books and value system, is
equipped to deal with this challenge. The “right to live” might possibly have to be twinned
with a “right to die” – accompanied by a clarifi cation of the associated how and when.
441

IV. OPTIONS FOR ACTION – NEW FOUNDATIONS FOR “BETTER” AND “MORE”?
Here, considerations on what options exist for taking action have to be restricted
mainly to political processes and procedures; the breadth and complexity of the issue
hardly allow for consideration of matters of substance and content. For these, given the
fact that Germany is active and recognised for its activities in the two fi elds of international
policymaking under review here – human rights and international social standards
– the most that can be expected is “better” and “more”.
442
IV.1 Coherence and active multilateralism
Ensuring policy coordination and coherence represents the greatest challenge to the
international organisations and to policy-making in their member states. “In practice,
the multilateral system is under-performing in terms of ensuring coherence among economic,
fi nancial, trade, environmental and social policies to promote human development
and social progress.” 49 Better coordination between international organisations is
one thing, but the member states’ formulating the policy of those organisations is quite
another: the most that is possible is that which the (majority of the) states want. These
member states are as a rule present in various international organisations and the principle
which generally applies is “coherence starts at home”. Without improved consultation
and coordination procedures for each country’s national policies there is a danger
that international policy will remain inconsistent and partly self-contradictory. International
policy should be seen and drafted as a “package”, for there are indications which
suggest that offers to negotiate and make concessions in one policy area will be met by a
greater readiness by others to shift their position in another policy area. In Germany too,
where coalitions are a constitutive element of government, better procedures for drafting
and coordinating policies and more transparency in decision-making should be possible
– at both the political and the administrative level – possibly along the lines of what is
being attempted in other EU Member States. In Germany, one possibility in this connection
might be the appointment at the Federal Chancellery or the Federal Foreign Offi ce
of a minister of state for international policy coordination. A further desideratum is that
the established ministerial portfolios be broadened or reconfi gured in view of the fact
that the issues which are of critical importance today are more than likely to be located
in border zones overlapping more than any one single portfolio.
IV.2 “Politicisation” of international politics
Germany is normally perceived within the international organisations as being a
particularly loyal EU Member State, sometimes however as a country which “hides” behind
the EU. The general expectation is for a more fi nely chiselled political profi le which
would also allow for more transparency and openness in decision-making processes both
within Germany and in the coordination procedures within the EU. A sharper profi le is
49 Cf. Policy Coherence Initiative (PCI) of the ILO World Commission: A Fair Globalization,
p. 134 ff.; ILO Governing Body: A stronger social dimension of globalization: Follow-up to the
November 2004 meeting of the Working Party, Geneva, March 2005; Making decent work a global
goal: Recent developments and a proposal for a Globalization Policy Forum, Geneva, November
2005; cf. Note 32: UN Secretary General‘s High-Level Panel.

important both for the way Germany is perceived internationally and for the process of
legitimising policy-making within the country itself, inwardly throughout its democratic
structures. Policy necessarily has to be enacted and then implemented by the corresponding
institutions (ministries, embassies, other offi cial bodies). But policy should not give
the appearance of being “bureaucratic routine”, which it is perceived as being whenever
“the politicians” leave it bereft of presence and positioning. Two progressive phenomena
are in evidence here which point in the right direction: fi rstly the more frequent initiatives
by Member States to take the fl oor in the Human Rights Council to complement the
inputs of the EU presidency, and secondly the initiatives taken by Germany vis-à-vis the
ILO during its EU presidency and chairmanship of the G8. These advances should be
encouraged and pursued on a systematic basis.
IV.3 Foreign policy and the policy dialogue
The dialogue on human rights is an important area of German foreign policy; it should
be further consolidated and deepened and broadened in terms of its thematic coverage.
The deepening process should take place primarily through “lead nations”, countries
which wield particular clout within their grouping at the Human Rights Council and
are generally acknowledged as being the most inclined to engage in candid discussion.
These countries can be readily identifi ed. Regarding broadening the thematic coverage,
this should entail paying more attention to issues which are of particular concern to
developing countries, such as the right to development, economic, social and cultural
rights, freedom of religion, tolerance and racism. This human rights dialogue should be
positioned within the broader context of multilateral negotiations such as those on UN
reform, WTO trade policy, ILO social standards, the Millennium Development Goals and
development policy, and it should be addressed as a single complex. It should be expanded
systematically to include the core labour standards and the social standards; in this
connection it should examine issues such as implementation at the national policy level,
the diffi culties and resistance encountered thereby, and the possibilities of support being
forthcoming from bilateral and international cooperation. The human rights dialogue
should take place (with due coordination) at the level of government and parliament and
with the involvement of NGOs and specialist bodies. This dialogue, which sometimes
tends to slide into the proclamatory, formulated for the domestic audience and for media
consumption, should be made more specifi c, should not primarily focus on difference,
should avoid any hint of arrogance and should look instead for common features which
facilitate collaboration at the practical level.
IV.4 Development policy
By international standards, German development policy has done an exemplary job in
picking up the issues of human rights policy, core labour standards and social standards. 50
German policy within international organisations (e.g. the World Bank) and in bilateral
cooperation programmes is highly prominent and enjoys recognition, but it requires political
backing and systematic refi nement if it is to be properly acknowledged for its merits
50 Cf. „Umsetzung der Kernarbeitsnormen in Entwicklungsländern – Aktionen und Maßnahmen“,
BMZ, Referat „Entwicklungspolitische Informations- und Bildungsarbeit“, Bonn, September
2003.
443

and given adequate funding to make it effective. Cooperation with the ILO, dialogue with
partner countries and involvement of the (German) business community, trade unions and
non-governmental organisations in agreeing on voluntary codes of conduct and working
on programmes are all positive approaches which could and should be pursued and intensifi
ed. The political consensus evident in a strategy paper on cooperation with ILO could
be put to practical use in a framework agreement on technical cooperation and expanded
to cover Decent Work Country Programs. Development policy has the possibility of exerting
infl uence on democratic progress, social development, reconciling interests and migration
pressure. Active support for “tripartite” cooperation and of human rights institutions
and procedures at country level would unleash potential for change. The German system
of political foundations and decentralised support for development via non-governmental
organisations offer a sound platform for action in this respect. Human rights policy is in
large part legal policy, with high priority being attached to the development and funding
of independent and impartial judicial systems. There are signs at international level that
multilateral and bilateral development cooperation could be structured in accordance with
human rights considerations, for example by gearing it to the criteria formulated by the UN
Working Group on the Right to Development, criteria which highlight the essentially legal
nature of development and thereby establish a new understanding of rights and duties
within the national and international context. Integrating these criteria into German development
cooperation policy offers a credible opening for demanding minimum standards
in the fi eld of human rights, standards which are not only inspired by one’s own sense of
morals and ethics but are recognised as being of universal validity.
444
IV.5 Trade policy
European trade policy – and thus also German trade policy – is a fi eld for which competence
is incumbent on the EU Commission. In its trade negotiations, however, the leeway
available to the Commission depends on the policies pursued by the EU Member States.
The initiative to have social standards taken into account at the World Trade Organization
(WTO) was rejected by a majority of the Member States on the grounds that this amounted
to “covert protectionism” and that competence in this fi eld rests with the ILO. 51 Systematic
cooperation between WTO and ILO is at most rudimentary. 52 The competitive pressure
generated by China has caused some developing countries to begin reassessing their position
and generally led to more openness regarding the effects of further trade liberalisation
on their development prospects and in particular on employment. 53 It might therefore be
51 The 1 st WTO Conference of Ministers held in Singapore in 1996 stated: “We renew our commitment
to the observance of internationally recognized core labour standards. The International
Labour Organization (ILO) is the competent body to set and deal with these standards, and we
affi rm our support for its work in promoting them. We believe that economic growth and development
fostered by increased trade and further trade liberalization contribute to the promotion of
these standards. We reject the use of labour standards for protectionist purposes, and agree that
the comparative advantage of countries, particularly low-wage developing countries, must in no
way be put into question. In this regard, we note that the WTO and ILO Secretariats will continue
their existing collaboration.”
52 First joint study: „Trade and Employment – Challenges for Policy Research“, A joint study of
the International Labour Offi ce and the Secretariat of the World Trade Organization, Geneva 2007.
53 The FES/Evian Group: Multistakeholder Dialogue III (Lausanne 10.–12. November 2006)
„Global Trade, Economic Growth and the Globalisation of Employment“ with international par-

worthwhile reintroducing the standards issue, with the corresponding offers of compensation,
in the re-launched multilateral negotiations of the Doha Development Round. In the
forefront for re-introduction here are core labour standards such as freedom of association,
the ban on forced and child labour, and non-discrimination, all of which are constituent elements
of the body of core human rights. In view of the weakness of trade unions in many
countries and the virtually insurmountable obstacles placed in their path, the right to set
up independent trade unions and negotiate collective agreements must be given top priority
in coping with the social challenges of globalisation and therefore be made a core element
of all conventions. Other social standards such as those on health and safety at work,
appropriate working hours and a living wage (Decent Work) could also be implemented
without seriously compromising competitiveness and comparative advantage. 54 In bilateral
and regional negotiations, social and environmental standards have already been given a
more prominent position on the agenda, and since the election success of the Democrats
in the USA, it can be assumed that stronger emphasis will be forthcoming on regulatory
measures in the social and environmental fi elds. 55 As a general rule, the EU Commission
is likewise following this line. However, the new “China Strategy” predicating a Partnership
and Cooperation Agreement makes no commitment to address the standards issue.
Although EU Commissioner for Trade Peter Mandelson, speaking in Beijing, did mention
“fundamental rights” – in the context of opening up markets – and made a very cautious
reference to the possibility of “unfair trade advantages” arising through “distorted costs
and prices”, the corresponding working document makes no reference to the rights issue.
However, the working document does criticise China’s failure to fulfi l the commitments
undertaken in conjunction with accession to the WTO, the curtailment of investment and
property rights and the lack of protection for intellectual property. The only indication in
the document of the standards issue is that the desired dialogue could also include “European
and Chinese business, trade unions, NGOs and other stakeholders” when such inclusion
is deemed to be “useful and appropriate.” 56
IV.6 Human rights standards for the business community
As a reaction to the growing economic and political signifi cance of internationally
operating corporations, efforts have been made within the UN human rights system over
the past few years to encourage transnational and multinational corporations in particular
to assume more responsibility in the human rights fi eld and establish binding rules
to govern their conduct in this respect. These rules are intended to complement and ex-
ticipation from the two sides of industry, NGOs, academia and WTO chief negotiators confi rmed
this new openness.
54 Cf. Werner Sengenberger: „Globalisierung und sozialer Fortschritt – Die Rolle und Wirkung
Internationaler Arbeitsnormen“, Friedrich-Ebert-Stiftung, Globale Gewerkschaftspolitik, überarbeitete
Kurzfassung, September 2005.
55 Washington Post:ElectionsAlterTrade Climate – Democrats Eye Environmental,Labour
Clauses;cf.T.Greven:Social Standards in Bilateral and Regional Trade and Investment Agreements,
Friedrich-Ebert-Stiftung (Geneva), Dialogue on Globalization, Occasional Papers No. 16/March
2005.
56 Peter Mandelson: Europe and China: partnership, competition and leadership, Tsinghua
University Beijing, 7 th November 2006, SPEECH/06/658; Commission Working Document: Closer
Partners, Growing Responsibilities – A policy paper on EU-China trade and investment: Competition
and Partnership, (COM(2006)631 fi nal), 24 th October 2006.
445

tend the reach of the ILO system of social standards, which is largely geared to internal
corporate activities. The ILO published a Tripartite Declaration of Principles concerning
Multinational Enterprises and Social Policy as long ago as 1977 and has continued to
work on it ever since. One year previously, the OECD had adopted its Declaration on International
Investment and Multinational Enterprises and published, as part thereof, its
Guidelines for Multinational Enterprises, which were last amended in 2000 and issued
in the form of “recommendations” of the OECD Member States to enterprises. The year
1999 brought the “Global Compact”, an initiative of the UN Secretary-General encompassing
ten principles on human rights, social policy and environmental policy to which
more than 2,500 companies in 90 countries have since voluntarily committed themselves
and thereby subjected themselves to an albeit very limited monitoring mechanism. By
contrast, the proposed UN Norms on the Responsibilities of Transnational Corporations
and Other Business Enterprises with Regard to Human Rights 57 which were tabled by the
Sub-Commission of the Human Rights Commission in 2003 were rejected by the Human
Rights Commission in 2005 because of insuffi cient support from Member States, resistance
from industry federations and an unenthusiastic stance by trade unions fearing a
dilution of the ILO standards and procedures. 58 Non-governmental organisations, including
the Deutsche Forum Menschenrechte, spoke out in favour of these proposed norms.
At the suggestion of the Human Rights Commission, in 2005 the UN Secretary-General
instituted a Special Representative on the Issue of Human Rights and Transnational Corporations
and other Business Enterprises and appointed the Harvard political scientist
John Ruggie to the post. The Special Representative has since fi led an interim report, consulted
with representatives of the two sides of industry and NGOs and held a series of
regional consultations. He will communicate his report to the Human Rights Council in
spring 2007. 59 Countries such as Germany and also the social partners will have decisive
infl uence on the procedure adopted for thereafter, and they must take their responsibility
here seriously. They need to adopt unequivocal positions and make a determined effort
to ensure that the various relevant human rights and social policy instruments interact in
a coherent and complementary manner.
446
IV.7 Economic, employment and migration policies
Germany and Europe as a whole will have to make a swift and determined effort to
revamp their economic, employment and migration policies. As laid down in the EU’s
Lisbon Strategy, Europe will have to develop faster into a “knowledge-based economic
space” by means of “modernisation of the European social model, investment in people,
and combating social exclusion”. What is needed to achieve these goals is a higher rate of
overall labour force participation, a higher rate of employment for women and men of all
age brackets. This signifi es a paradigm shift in terms of labour market policy, a shift away
from protecting jobs towards more overall employment backed up by corresponding con-
57 Cf. Nils Rosemann: The UN Norms on Corporate Human Rights Responsibilities, Friedrich-
Ebert-Stiftung (Geneva), Dialogue on Globalization, Occasional Papers Nr. 20/August 2005; T. Rathgeber:
UN Norms on the Responsibilities of Transnational Corporations, ibid. No. 22/April 2006.
58 Discussion paper: „ILO – UN Normen – Synergien oder Konkurrenz?“, submitted by Heidi
Feldt acting for the Friedrich-Ebert-Stiftung (Geneva), IG Metall, Misereor 2006 (internet version).
59 The FES Offi ce in Geneva directly supports the work of UN-SR John Ruggie by means of consultancy
measures and public events; see www.fes-geneva.org; www.business-humanrights.org.

tinuing training strategies. “We Europeans urgently need to re-set our priorities: away
from protecting jobs and towards protecting people.” 60 The necessary combination of
fl exibility and security is frequently referred to as “fl exicurity”, as fl exibility founded on
security. The aim is a state which is activating and effective, the “provident social state”
which enables people “to cope with change responsibly and in a spirit of solidarity” and
demands “fair and equal opportunities for every individual to participate in education,
work, culture and the democratic process, irrespective of his or her social and ethnic
background.” 61 This policy revamping must be complemented by an immigration policy
based on selective criteria, with the ILO social standards and the human rights standards
remaining fully protected and refugees and asylum-seekers continuing to be able to fi nd
refuge in Europe. In human rights terms (habeas corpus), protecting such refugees and
asylum-seekers has priority over protecting the state.
IV.8 Germany’s ILO policy
Germany’s ILO policy must become more “political” and more “public”. Politics
requires a public arena in order to seek and obtain support and legitimacy. Permanent
and more transparent preparation procedures for coordinating German positions for
the International Labour Conference and the ILO Governing Body could have a benefi
cial effect in this respect, especially if implemented within the tripartite, inter-institutional
and general public context. International social policy must be given more
prominence as a subject for deliberation within the Bundestag and its committees,
preferably backed up by public hearings in the Labour and Social Affairs Committee
with the involvement of the social partners and civil society organisations. Granting
access to the ILO to national and international non-governmental organisations is and
will remain a controversial issue as the social partners assiduously attempt to consolidate
the existing, unique tripartite structure of the ILO. To its detriment, Germany’s
ILO policy shows a remarkable overestimation and under-use of the ILO – the organisation
is believed to be able to do more to infl uence the social aspects of globalisation
than it actually can without the necessary massive political support, and the social
partners make inadequate use of the possibilities offered by the non-observance of
conventions procedure for reasons of not wanting to offend vested economic and political
interests.
To make Germany’s ILO policy more “political” and “public”, closer cooperation
with economic partner countries in implementing international labour standards and
strengthening social security standards could serve as an additional support measure.
Likewise helpful would be an improvement in the degree of coherence between different
policymaking fi elds and a coordinated approach to dealing with social issues at the
European and international level. A country which wants to see social standards implemented
in its own interests should also be willing to offer incentives and make concessions
which are in the interests of its partner countries, e.g. in the negotiations at the
WTO. Federal Chancellor Angela Merkel and the Federal Minister of Labour and Social
60 Jaques Delors/Poul Nyrup Rasmussen: „Für ein neues soziales Europa“, in: Frankfurter
Allgemeine Zeitung, 16. November 2006, S. 10.
61 Kurt Beck/Franz Müntefering/Peter Struck: Der Vorsorgende Sozialstaat, Impulspapier
zur Programmkonferenz „Der vorsorgende Sozialstaat“ vom 25. November 2006 in Berlin, SPD
Parteivorstand.
447

Affairs Franz Müntefering have already spoken out in favour of “social and ecological
minimum standards” at the WTO, the “implementation of social rules for the markets”
and the “enactment of the proposals of the ILO World Commission” and have thus provided
impetus and assumed responsibility for a more coherent international economic
and social policy 62 which, however, must take account of the employment and development
observation made by ILO Director-General Juan Somavia: “But rights at work are
not much use if you do not have work.”
448
IV.9 Germany’s human rights policy
Human rights are assets destined not only for export: they need to be exercised
both at home and abroad with equal intensity. For that reason, to judge the situation
at home in an opinionated and arrogant manner would be indefensible. Given that
the German judicial system with its guarantees of legal redress (including legal aid)
right up to the Federal Constitutional Court does indeed offer an above-average level
of protection for human rights compared with general European standards, and also
that many cases taken to the European Court of Human Rights are taken there because
some democratic states have no supreme courts to rule on administrative and
constitutional matters, Germany theoretically has the possibility of doing more to urge
others to do more and even playing a pioneering role, for example in the matter of the
individual complaint procedure for economic, social and cultural rights or the Additional
Protocol to the Convention against Torture. In the light of the already outlined
challenges and threats to human rights policy at home, there is a need for a pro-active
strategy here. Human rights must also be made a subject of home affairs policy. An
important step here would be the drafting of a national plan of action for human rights
– in line with the decision of the Bundestag of 13th March 2003. 63 The setting up of the
Deutsches Institut für Menschenrechte and improved cooperation between the relevant
Bundestag Committee, ministries and the Forum Menschenrechte have established a
constructive climate of cooperation which could be further enhanced by the establishment
of a national human rights commission, 64 directly accountable to the Federal
Chancellery, which would bring together representatives of all major social groupings
and work in close cooperation with the Deutsches Institut für Menschenrechte. The
existing Commissioner for Human Rights Policy and Humanitarian Aid at the Federal
Foreign Offi ce should not be made obsolete by such a new body, indeed, the incumbent
should be encouraged to contribute to its work. Communicating country reports to the
Bundestag and expanding national delegations to the UN, the Council of Europe and
the EU by adding representatives of civil society organisations (e.g. from the proposed
national commission on human rights) as members or advisers are further conceivable
possibilities. Giving more prominence to human rights education in all educational
establishments is another possibility requiring urgent attention. Religious education,
however, should be left to the respective faith communities. By contrast, civic educa-
62 Reden, Internationale Konferenz des Bundesministeriums für Arbeit und Soziales zur
sozialen Dimension der Globalisierung, Berlin, 22.–23. November 2006.
63 Cf.. Frauke Weber: „Ein Nationaler Aktionsplan für Menschenrechte in Deutschland?“,
Deutsches Institut für Menschenrechte, Berlin, September 2003.
64 Cf. Valentin Aichele: „Nationale Menschenrechtsinstitutionen in Europa“, Deutsches Institut
für Menschenrechte, Berlin, April 2004.

tion in human rights and democracy is a task incumbent on the state. 65 Human rights
education is a matter of “training the eye” and developing a sense of justice, and every
“civil servant” should participate in corresponding training programmes. After all, the
state is required to “respect”, “protect” and “fulfi l” human rights, to face up to the issues
of the future and strike the necessary balance between a variety of human rights.
In some areas this will not be possible without casting doubt on certain cherished
“politically correct” positions. How well Germany succeeds in coping with the challenges
of ever fi ercer competition, a rapidly ageing population and the associated social
confl icts for a share of the available resources and at the same time implements the
social standards and human rights will be of decisive importance in securing peace
within Germany and guaranteeing the country’s ability to interact with integrity with
the outside world.
On the author: Erfried Adam is Resident Director of the Friedrich-Ebert-Stiftung in Prague, where he is
responsible for FES programs in the Czech Republic and Slovakia.
65 Paul Scheffer: Tolerance cannot be founded on fear – If you want to integrate the Muslims,
you have to pay particular attention to strictly separating state and religion, in: FAZ, 21th October
2006, p. 40.
449

450
GLOBAL HEALTH – A POLICY FIELD OF
UNDERESTIMATED IMPORTANCE
Wolfgang Hein
This article authored by Wolfgang Hein was originally published by Friedrich-Ebert-
Stiftung, Department for Development Policy, Berlin, 2007
ABSTRACT
Globalisation has led to a fundamental change in the requirements for global health.
The more rapid spread of disease is now also posing an increased threat to the northern
hemisphere, while the socioeconomic consequences of the poor health situation in large
parts of the southern hemisphere are hampering development and contributing to social
and political instability. At the same time, civil society stakeholders in particular are
strengthening the normative meaning of „health“ as a social human right.
In the face of the growing importance of global health as a policy fi eld and the conversely
diminishing ability of intergovernmental organisations to deal with these problems
effectively, both civil society and private sector stakeholders have increasingly begun
to occupy the global political arena. This multiplicity of stakeholders has resulted
in a complex architecture of Global Health Governance (GHG), whereby global health
problems have increasingly become the focus of international and transnational policy.
While the revision of the International Health Regulations (IHR) has helped strengthen
the World Health Organization (WHO) in part, the confl icts surrounding access to drugs
(and other resources) and the fi ght against HIV/AIDS are mobilising the entire spectrum
of Global Health Governance stakeholders. Due to growing problems surrounding coordination,
improving inadequate health services and sanitary conditions in poor countries
has not, however, become any easier.
Germany has shown little policy initiative in the area of global health. The Federal
Ministry for Economic Cooperation and Development does support projects of note in
the fi ght against HIV/AIDS, yet Germany has played virtually no part in the discourses
on central issues of global health policy. In terms of per-capita income, the German contribution
to combating HIV/AIDS trails way behind that of other OECD countries. The
statements made so far relating to Germany‘s double presidency (G8 and EU) give little
cause to expect any new momentum being given to this policy area.
There are three conceivable scenarios: broad global commitment, with an adequate
transfer of resources, can lead to fundamental improvements in the health situation in
the developing countries, which in turn has a positive effect on the global control of disease
and on social and political stability (1). A very narrow focus by the OECD countries
on their own, short-term interests (averting the spread of disease, effective insulation
against the health problems in poor countries) is not improbable, in doing so making use
of the International Health Regulations and other means of control of epidemics (2). This
can, however, easily slide over into a global crisis (3). If this happens, global problems
will tend to get out of control. Increasing political unrest in crisis regions will hamper the

development of health services and the spread of epidemics will also affect many in the
northern hemisphere.
A German „foreign health policy“ could promote the development of scenario (1) if a
worldwide social and health policy were to be viewed as part of a global regulatory policy
which also recognises rights and obligations in this area, particularly those involving a
clear increase in the transfer of resources. Until now, initiatives to make comprehensive
improvements to the health situation in poor countries have tended to remain in the
background against the control of infectious disease, particularly HIV/AIDS. Any drive
for a systematic European policy and for G8 obligations to strengthen Global Health Governance
in this sense could provide important momentum for developing global health.
I. FROM INTERNATIONAL HEALTH POLICY TO GLOBAL HEALTH GOVERNANCE
I.1 New challenges posed by international health problems
Compared with the situation in the 1970s, in which the World Health Organization
(WHO) shaped global health policy in keeping with its mission statement, globalisation
processes – economic, political and communicative – have led to a fundamental change
in the requirements for making progress with the global health situation and with global
health policy. 1 The tightening mesh of social relationships in an emerging world society
has important consequences, both in terms of the rapid global spread of disease and of
the signifi cance being attributed to the social and economic consequences of the poor
health situation of a considerable proportion of the world population. A whole range of
aspects points to the fact that health has become a key global problem:
– A more rapid spread of health problems can be observed: on the one hand, as a result
of the expansion and acceleration of global mobility (this particularly affects rates of
infectious disease) and, on the other, from the globalisation of consumer habits as a
consequence of global advertising and cultural assimilation (for example smoking,
changing nutritional patterns). HIV/AIDS represents a global threat and new, hitherto
unknown diseases, such as Ebola and SARS, are being viewed as examples of the
new global health risks.
– The increasing resistance of pathogens to antibiotics holds great dangers. It is the
result not only of both excessive use of these drugs by the middle and upper classes
and of incomplete courses of treatment among poorer people, particularly because of
inadequate medical supervision, but is also a consequence of the widespread use of
antibiotics in livestock production. The emergence of pathogens resistant to most antibacterial
agents has now become a serious problem in the treatment of tuberculosis
and malaria.
– The accelerated spread of drugs and medical technology to virtually all corners of
the globe has the potential to help the fi ght against disease worldwide, yet is increasingly
posing ethical problems, since the income-based inequalities in healthcare are
becoming ever more evident.
– In the face of the debt crisis and the priority given to macroeconomic restructuring
in the 1980s (“getting the macroeconomic fundamentals right”), socio-political
1 A good overview of this is provided by Kelley Lee (ed.): Health Impacts of Globalization. Towards
Global Governance. Basingstoke: Palgrave 2003; Kelley Lee/Jeff Collin (eds.): Global Change
and Health, Milton Keynes: Open University Press 2005.
451

programmes (such as health policy) were no longer considered a primary focus of
development cooperation. The crisis taking place in primary health care became clear
in the 1980s when, in the poorest countries, even the most basic types of provision
(vaccinations, pre-natal care) were increasingly suffering from lack of funding. 2
– The liberalisation of international trade (including the international regulation of intellectual
property rights by the TRIPS Agreement) reduced the level of control individual
nations have over the production of and access to drugs, medical equipment,
and – with the advent of the General Agreement on Trade in Services (GATS) – also
reduced their control to a certain extent over the range of medical services offered. 3
– Since the mid-1990s, there has been evidence of growing apprehension about the
vicious circle of rising poverty and greater vulnerability to health problems in an
increasingly global society. People are becoming ill more frequently because they are
poor, while the illness in turn simply makes them even poorer – particularly when
there is no adequate public health service.
– The governments of the OECD countries are becoming ever more concerned in the
face of the international health situation – both about the spread of infectious disease
across borders and the possible political and economic instability that is associated
with a high incidence of poverty-related disease in some regions of the world (such
as HIV/AIDS). This is one reason for the increasingly important role being played by
health since the 1990s, including its importance at the G7 and G8 summits and the
declarations adopted at these.
As a consequence of these new challenges to global health policy, the institutional
structure of this policy fi eld has changed rapidly. Structures have emerged that could
be described as embodying prime examples of global governance. In the following, I
do not use the term global governance in the normative sense of cooperative networks
for solving global problems (such as the UN Commission on Global Governance), but
rather use it to refer to, on the one hand, the signifi cance of an increasingly more
complex transnational arena for dealing with international political confl icts and, on
the other, to a different allocation of responsibilities among governmental and private
stakeholders. 4
Global governance is characterised by the fact that, in a range of policy areas, international
governance institutions (in particular the UN system) are, due to their political
decision-making mechanisms and bureaucratic structures, often largely ineffective or
do not “tackle” problems as they arise. Civil society and private sector actors are consequently
able to occupy the global political arena and exert infl uence themselves even
if they are – according to the understanding of traditional politics – in no way whatso-
2 Cf. David Werner/Sanders, David 1997: Questioning the solution: The Politics of Primary
Health Care & Child Survival. Palo Alto: Healthwrights 1997.
3 Cf. Koivusalo, Meri: Global Governance, Trade and Health Policy, in: Wolfgang Hein/Lars
Kohlmorgen (eds.): Globalization, Global Health Governance and National Health Politics in Developing
Countries. Schriften des Deutschen Übersee-Instituts, 60, Hamburg 2003, pp. 203-224;
Maureen Mackintosh/Meri Koivusalo: Commercialization of Health Care: Global and Local Dynamics
and Policy Responses, Basingstoke: Palgrave 2005.
4 Cf. inter alia Dirk Messner/Franz Nuscheler: Das Konzept Global Governance – Stand und
Perspektiven, INEF-Report 67, Duisburg 2003; Mathias Koenig-Archibugi/Michael Zürn (eds.):
New Modes of Governance in the Global System, Basingstoke 2006.
452

ever authorised to do so (such as CSOs 5 and companies) or have at their disposal few
hard power resources (such as most CSOs). The role of these new stakeholders and
new political constellations is outlined in the following, using four problem areas as
examples.
I.2 The International Health Regulations: successful cooperation to combat the threat
of global epidemics
In 1951, the World Health Assembly adopted the International Sanitary Regulations
(since 1969: International Health Regulations). These regulations, however, became increasingly
unimportant. The key reasons for this were better control of infectious disease
in the developed world and a sharp decrease in the incidence of, or complete eradication
of, the diseases the IHR were concerned with (such as plague and smallpox). In 1995,
talks were begun to revise the Regulations, with these negotiations dragging on considerably
at fi rst.
The fact that the negotiations were brought to a speedy conclusion between 2003
and 2005 can be attributed primarily to the experience of the outbreak of SARS (Severe
Acute Respiratory Syndrome) and its successful control, which was due mainly to good
management by the WHO. The agreement, adopted in 2005, will come into force in April
2007. It can therefore be described as groundbreaking, since, in the event of a public
health emergency of international signifi cance, the WHO is granted far-reaching powers
and non-governmental organisations are assigned key roles. 6 The fact that the new IHR
are not restricted to previously stipulated diseases is also of fundamental importance.
The regulations also cover international health risks from biological, chemical or radiological
sources. As in the prior agreement, the aim is both to limit the effects of international
dangers to health and to avoid unnecessary restriction of transport and trade.
The WHO has the right to require that member states develop appropriate capacities
for monitoring possible international health risks. It can, however, also use non-governmental
information sources and, as required, issue recommendations for the restriction
of travel and trade without the consent of the government concerned. In the case of
SARS, the new IHR model, whose main features had already been agreed upon, was
tested successfully, so to speak, and, in the case of bird fl u (the H5N1 virus), it can be
said that there was at least successful containment.
I.3 Access to drugs and the signifi cance of new stakeholders for global health policy
Drugs have always played a central role in the treatment of disease – and in most
societies, they have been developed and manufactured by private stakeholders for a long
time. Hence they have also frequently been the cause of confl ict between public authorities
responsible for health policy and private enterprises pursuing quite different interests
in that the latter naturally base research and development on the chances of bringing
to market those products which promise a profi table rate of return. With regard to
medicines, this causes two kinds of problem:
5 CSO stands for Civil Society Organisation.
6 cf. in particular David Fidler: From International Sanitary Conventions to Global Health Security:
The New International Health Regulations, in: Chinese Journal of International Law, Vol. 4,
2005, pp. 325–392.
453

(1) On the one hand, no profi ts can be made from drugs or vaccines for illnesses
found only in poor countries, meaning that research in this area has long been neglected.
This even holds true for very widespread diseases such as malaria and tuberculosis,
where the funding provided for research has fallen far short of mirroring the signifi cance
of these diseases. The problems surrounding these so-called “neglected diseases” has
increasingly become the topic of debate from the late 1980s onwards, resulting in the development
of a range of Global Public Private Partnerships (GPPPs) in the 1990s. These
cooperative ventures were, for the most part, set up on the initiative of the WHO, being
mainly fi nanced by large charitable trusts (particularly the Bill & Melinda Gates Foundation),
but also partly from state contributions. Pharmaceutical companies were responsible
for the scientifi c and technical aspects of operation. In the case of the Drugs for Neglected
Diseases Initiative (DNDi), Doctors without Borders (Médecins Sans Frontières)
took the initiative as a civil society organisation in developing a cooperative framework
bringing together international organisations, government institutes in the fi eld of drug
research and production and private manufacturers of pharmaceuticals to work on various
projects to develop drugs for these diseases.
(2) On the other hand, drugs developed by pharmaceutical companies in response
to demand in developed countries are sold at such a high price during the period of
patent protection (generally 20 years) that the costs of research and development are
easily recovered. In the developing world, however, these drugs can only be afforded
by few people. As long as no internationally enforceable patent protection was in place,
it was still possible to produce generic versions of these drugs in technologically more
advanced countries such as India and Brazil. This changed with the coming into effect
of the TRIPS Agreement in 1995, even if its cover was at fi rst not comprehensive due to
transitional arrangements.
In the case of HIV/AIDS and the antiretroviral (ARV) therapies developed because of
demand in the industrialised countries , the situation arose whereby drugs were available
that, for practical purposes, turned AIDS into a chronic illness, but at a price which the
majority of those affected worldwide could not afford. The problems surrounding access
to drugs were made evident by the fact that Indian pharmaceutical companies were
manufacturing generic versions and offering them at less than one tenth of the price of
the original versions, but these could not be sold in many developing countries in which
a TRIPS-compatible patent law was already in force.
454
I.4 HIV/AIDS as a catalyst for developing Global Health Governance
The problems and the responses to these problems have been pointing clearly, on
the one hand, to the close interdependence of international regimes hitherto regarded as
separate (not only trade and health, but also human rights and health) and, on the other,
to the growing importance of new stakeholders and institutional forms. This has brought
about diverse forms of cooperation between civil society, governmental (national and
international) and private sector stakeholders. Given the high number of those affected
in the developing countries (in 2006, there were approximately 40 million people infected
with HIV, of whom around 37 million were in developing countries) and the perception
of HIV/AIDS as a global threat, this illness has become an effective catalyst for developing
new structures in international health policy.
Reference was made earlier to the disputes surrounding access to antiretroviral drugs.
The sharp reduction since 2000 in the cost of fi rst-generation antiretroviral therapies has

for the fi rst time placed treatment within the fi nancial reach of those infected with HIV in
developing countries. However, other quite separate methods of combating the disease
(prevention, diagnosis and monitoring) require considerable funds that far exceed the
amounts traditionally provided as aid in the health fi eld.
Since the mid-1990s, this situation has been leading to innovative approaches such as
those mentioned above. For one, an attempt was made to create synergies: UNAIDS (the
United Nations Programme on HIV/AIDS) was founded in 1995/96, with the primary
aim of improving coordination between the organisations involved in the fi ght against
HIV/AIDS (including CSOs). This attempt failed, however, largely due to the relative infl
exibility of the international organisations involved, with the key developments (the G8
Initiative and the establishment of the Global Fund, the mobilisation of CSOs to improve
access to drugs) taking placing outside the sphere of UNAIDS.
The establishment of the Global Fund to Fight AIDS, Tuberculosis and Malaria (GFATM)
represents the farthest-reaching initiative in terms of international health funding. Its purpose
stems from the G8 proposal to make considerable funds available for the fi ght against
HIV/AIDS and it was supported by UN General Secretary, Kofi Annan. Since some G8
members refused to allocate the funds via a UN organisation (which was seen as not suffi
ciently “result-oriented”), an independent fund was established, based on the PPP model
(state governments, representatives of private enterprise and civil society organisations as
decision makers; IGOs only as non-voting members of the Executive Council). PPPs (particularly
the so-called Accelerated Access Initiative) were also established as a vehicle for
enabling pharmaceutical companies to make drugs available cheaply to developing countries
in the spirit of Corporate Social Responsibility (CSR) without affecting patent rights.
Diverse initiatives by CSOs supported the demands of developing countries that they be
able to make use of the fl exibilities in the TRIPS Agreement and to do so safely. These fl exibilities
made it possible to import generic versions of drugs (via so-called parallel imports)
and grant compulsory licenses for the production of generic drugs (Doha Declaration of
2001 and subsequent negotiations). In addition to this, mention should be made of the US
programme, PEPFAR 7 , which, as a bilateral programme, makes considerable funds available
for combating HIV/AIDS. In the end, the WHO engaged in this process more actively
again with the “3 by 5 Initiative” (aiming to treat three million people in 2005). When it
became clear that, despite a considerable increase in treatment levels, this target could not
be achieved, the plan became that of “universal treatment by 2010”.
The very problems surrounding the treatment of HIV/AIDS, however, have again
brought the importance of properly functioning health systems more strongly to the fore
(even though the WHO and World Bank have long been making reference to this again).
Despite the considerable increase in international aid to combat HIV/AIDS since the
beginning of this decade, the inadequate infrastructure of the health service in many
countries receiving aid has increasingly proved a problem (accessibility of medical facilities,
diagnostic capacity, shortage of health service staff, etc.). Aid coming from many
different institutions has created problems with coordination and has not exactly made
it easier to develop integrated national health systems.
The basic set of problems surrounding the issue of access to drugs in general arises
from the relationship between the global requirements for drugs and the manner in which
7 PEPFAR stands for The President’s Emergency Plan for AIDS Relief. This bilateral US programme
of massive funding to combat HIV/AIDS came as a surprise, since it takes possible funds
away from the GFATM, the establishment of which was also supported by the US.
455

intellectual property rights stimulate pharmaceutical research. In its General Comment
No. 14, the UN Committee on Economic, Social and Cultural Rights (CECSR) emphasises
that the right to “the highest attainable standard of physical and mental health” obliges
member states to make available those drugs, which are indispensable (as stipulated in
the WHO list of essential drugs). For this obligation to be taken seriously, either the TRIPS
Agreement has to be changed fundamentally or the international community has to fi nd
other ways of orienting the criteria for research and access to vital drugs towards global requirements.
The decision of the World Health Assembly in 2006 to open talks on a Global
Framework for Essential Health Research is an important step in this direction.
I.5 Healthcare systems and sanitary conditions in poor countries: the basis of global
health policy
Since the late 1990s, the need to promote all aspects of health, particularly in developing
countries, has come more strongly to the fore in matters of international cooperation,
along with the focus on reducing poverty. The strong emphasis on health as part of the
Millennium Development Goals points to the growing importance of this area, while the
Commission on Macroeconomics and Health set up by the WHO has made a convincing
case for the importance of health as a precondition of economic development. Strategies
for combating and controlling infectious disease, the most important cause of illness in
poor countries, are not far-reaching enough, in part because the diseases traditionally associated
with the developing world, such as cancer and cardiovascular disease, are on the
increase in most developing countries. The large differences in income between the rich
and poor regions of the world demand a considerably greater transfer of resources in the
global health fi eld – not only to combat infectious diseases such as HIV/AIDS, but also
to make overall, country-wide improvements to the health situation in poor nations. To
this end, a range of initiatives have come into being in recent years that are analysing the
problems of global health fi nancing against the backdrop of the complex structures of
Global Health Governance and are exerting increasing pressure on the developed world
to rethink its role in global health policy (the Alliance for Health Policy and Systems Research;
the Health Financing Task Force; the Global Health Financing Initiative).
This brief outline of the developments in global health policy indicates that in particular
in the sociopolitical fi elds of global governance foreign policy has become very complex.
The reality of having to deal with political constellations involving a tangle of various and
very different stakeholders with greatly divergent interests does not make it easy for governments
to develop a coherent approach. These multi-stakeholder constellations also cause
the well-known coordination problems for the developing countries, and these problems
have become an issue in the debates over the effectiveness of development cooperation.
Seen from another perspective, this development gives non-governmental stakeholders
the chance to exert an infl uence on global governance that is not possible within a
system of intergovernmental relations (based on the aggregation of interests at the level
of each nation state). They can do so by not only driving a global debate within civil
society but also by participating in political processes. It is now becoming possible to
mobilise resources (not only fi nancial resources, but also expertise) that would not generally
be made available to traditional international organisations. Beyond this too, there is
the possibility of much greater fl exibility of political processes, including the overcoming
of political barriers in these organisations. The development of a complex architecture of
456

Global Health Governance has undoubtedly placed global health problems more fi rmly
at the centre of international and transnational political processes – even if this does not
yet seem to have been fully recognised in German policy on global health.
To meet these challenges, new forms of international health policy must be developed
such as those that have been set out under the key phrase of Health Diplomacy 8 . The aim
is to use networking, the exchange of expertise and the development of capacity to, on
the one hand, bridge the gaps between diplomats and health experts, and, on the other,
to close the gaps between the bargaining power of developed and developing countries.
Thus new models can be developed for global health as an integrated policy fi eld.
II. GERMAN POLICY AND GLOBAL HEALTH
Who makes international health policy in Germany? The problem of ministerial responsibility
and coordination between governmental departments in relation to negotiations
in areas of global governance has been gaining increasing attention in recent
years. 9 In principle, the ministry with overall responsibility for global health policy is
the Federal Ministry of Health, due to its responsibility for cooperation with the WHO.
However, other ministries have the main responsibility for dealing with other important
international organisations in the health fi eld (the World Bank and the GFATM: Federal
Ministry for Economic Cooperation and Development; UNICEF: Federal Foreign Offi ce).
Furthermore, due to the development of Global Health Governance, other key players in
the fi eld of international health policy come from diverse areas of global governance, for
which yet other government departments are responsible.
This situation forms part of the basic problem of current foreign policy: as a result of
the globalisation of social relationships, so-called foreign policy problems are connected
to a multitude of policy areas. One peculiarity of “foreign health policy” consists, however,
in the fact that it is treated as little more than a side issue in virtually all government
departments concerned. The Federal Ministry of Health concerns itself with international
health policy only when German interests are clearly affected (e.g. the control of
epidemics, bird fl u) or if it seems absolutely necessary for diplomatic reasons (such as
with the Federal Government’s strategy for combating HIV/AIDS developed together
with the Federal Ministry for Economic Cooperation and Development and submitted as
a response to an obligation to this effect arising from the UN General Assembly Special
Session on HIV/AIDS in 2001).
The homepage of the Federal Ministry of Health allocates only a low priority to the
central problems of international health policy. It is in fact emphasised that Germany
contributed 5% (41 million US dollars) of the entire budget of the WHO for 2004/2005.
This is only the case, however, if the voluntary contributions to the WHO are disregarded.
Effectively, however, the WHO was funded for the most part from voluntary
contributions, which amounted to more than double the obligatory contributions (1.94
8 Cf. Ilona Kickbusch/Gaudenz Silberschmidt/Paulo Buss, Global Health Diplomacy: the need
for new perspectives, strategic approaches and skills in global health, in WHO Bulletin 2007 (forthcoming).
9 Cf. inter alia Walter Eberlei/Christoph Weller, Deutsche Ministerien als Akteure von Global
Governance. Eine Bestandsaufnahme der auswärtigen Beziehungen der Bundesministerien, Duisburg
(INEF Report, Issue 51) 2001.
457

illion US dollars by comparison with a scheduled budget of 880 million US dollars in
the same years). The Federal Government’s share of these voluntary contributions was,
however, minimal (only a few 100,000 euros). Since the voluntary contributions facilitate
the promotion of certain initiatives, this can be seen as evidence of a comparably limited
German commitment to issues of Global Health Governance. This interpretation is also
confi rmed by the low level of German participation in those international commissions
set up on the initiative of the WHO which have in recent years been channelling and furthering
the debate on the central problems surrounding the future development of global
health. These commissions include the Commission on Macroeconomics and Health, the
Commission on Intellectual Property Rights, Innovation and Public Health and the Commission
on the Social Determinants of Health).
This low level of commitment is particularly regrettable given the traditionally signifi
cant role played by Germany in international medical research on infectious disease,
including tropical diseases. Of course, the fi nancing of WHO Cooperating Centers is
an important contribution, but there is hardly any evidence of important international
health policy initiatives originating even from these. With few exceptions, this also holds
true for the fi ght against HIV/AIDS: the work of the Federal Ministry of Health is, in this
respect, essentially oriented towards Germany, with hardly any reference being made to
the key problems set out above in relation to the international fi ght against HIV/AIDS
(one exception are the activities of the “3 by 5 Initiative” in Eastern Europe).
The Federal Ministry for Economic Cooperation and Development is, however, responsible
for cooperation with developing countries – and therefore also for the fi ght
against HIV/AIDS in these countries. This involves the Global Fund (GFATM) and thus
the largest share of Germany’s fi nancial contribution to international health policy.
Through its German Agency for Technical Cooperation (GTZ), the Federal Ministry for
Economic Cooperation and Development supports a whole range of projects in the fi ght
against HIV/AIDS. Additionally, Germany is also represented in the management of the
Global Fund. The BACKUP 10 initiative in particular, which primarily supports partners in
managing cooperation with the Global Fund, can be seen as groundbreaking, especially
as it is bringing together bilateral and multilateral cooperation and thus helping overcome
the problems of coordinating national health policies and Global Health Governance
institutions. Given the problems already outlined surrounding access to drugs, it
seems, moreover, that a project supporting the development of research capacities and,
particularly, of pharmaceutical production facilities in low-income countries is pointing
in the direction we should be taking.
In the fi ght against HIV/AIDS, of all the obligations that are accepted in principle, nowhere
near all of them are in actual fact fulfi lled. Thus a detailed paper issued by Action
against Aids Germany 11 stresses that, with regard to the G8 and EU Council presidency,
there is no telling “whether the Federal Government will see to it that the challenge
posed by HIV/AIDS is put on the agenda [of the G8 and EU] as a matter of priority” (p.6).
Germany, it is stated, is still trailing far behind in terms of making a proportionate fi nancial
contribution to combating the pandemic. 12 On the whole, the status Germany grants
10 Building Alliances – Creating Knowledge – Updating Partners.
11 Joachim Rüppel/Sonja Weinreich, Stop AIDS. Keep the Promise. Globale Krise und Deutschlands
Beitrag zur Globalen Antwort (Aktionsbündnis gegen AIDS), Berlin, May 2006.
12 Cf. ibid., p. 7. Based on its gross national income, Germany trails far behind in the commitments
it has made to funding HIV/AIDS, at 59.6 US$ per 1 million GNI, as compared with the
458

the health sector in terms of development policy seems to be rather low. In the past few
years, only one position paper on sexual and reproductive health was put forward and
likewise there were very few statements on Germany’s contribution to implementing the
Millennium Development Goals (MDGs), but no plan at all for better fi nancing of health
systems in developing countries (which is a central requirement for implementing the
health-related MDGs). To achieve this, cross-departmental initiatives would also undoubtedly
have been necessary. The way in which responsibilities are divided up between the
Ministry for Economic Cooperation and Development and the Ministry of Health really
does become a problem here. The Ministry for Economic Cooperation and Development
is not actually responsible for initiatives concerning global health in general.
If it is accepted that it has been becoming ever more evident on the international level
in the last few years that the central problem of global health policy lies in the extreme
inequalities between rich and poor countries, then this division of responsibilities causes
great diffi culties. In the context of the WHO and a whole range of initiatives, these problems
have been the subject of more thorough debate in recent years, particularly with
regard to the necessity for solid fi nancing of the development of health services (see
the initiatives mentioned above). The Ministry of Health is paying hardly any attention
to this issue at all, while the Ministry for Economic Cooperation and Development ultimately
has only limited responsibility for this area. 13 So far, Germany is excelling in these
initiatives only by its degree of absence.
The year 2007, however, with the presidency of both the EU Council and the G8, offers
opportunities to set new priorities in the fi eld of international health policy. On the
whole, the statements issued so far fl uctuate between two aims: on the one hand, a return
to the “traditional” key themes of the G8 – the global economy and international trade and
fi nance relations – and, on the other, “strengthening the endeavours of the G8 to support
the disadvantaged sections of the world’s population”. In the same vein, there is also talk of
“strengthening the African health systems, particularly in the fi ght against HIV/AIDS”. 14
In the government declaration on the double presidency, delivered on 14 December,
2006 by the Chancellor, Angela Merkel, anyone looking for the words “health” or “developing
countries” will search in vain. The “situation in the African countries” is fi rst mentioned
in relation to migration to Europe. The question of European foreign and security policy
is raised primarily with regard to “threats from weapons of mass destruction and international
terrorism” and military operations and peace missions abroad – as if there had never
been any discussion of an expanded concept of security. Yet it is stated in one short sentence
that “we want to give new hope to Africa during our G8 presidency”. All of this gives
very little cause to expect that health will play a similarly central role to that in 2006 during
the Russian presidency, when the fi rst meeting of the health ministers of the G8 nations
took place and a total of 52 commitments to combating infectious disease were set out.
United Kingdom ($303.0), the Netherlands ($442.8) and Sweden ($376.2) (cf. Jennifer Kates/Eric
Lief, International Assistance for HIV/AIDS in The Developing World, The Kaiser Family Foundation,
July 2006).
13 In the Bundestag Committee on Economic Cooperation, a hearing did in fact take place on
„Social security systems in developing and newly industrialised countries“. Among those present
was Mary Robinson as representative of the Health Financing Task Force, but it seems it is still
completely open in terms of to what extent this will result in any farther-reaching initiative.
14 Cf. Regierung Online, http://www.g-8.de/nn_93938/Content/DE/Artikel/2006/10/2006-10-
18-schwerpunkte-deutsche-g8-pr_C3_A4sidentschaft.html.
459

The low status accorded global health is also evident in the “18-month Programme of
the German, Portuguese and Slovenian Presidencies” adopted by the European Council
on 11 December 2006. Only three of 170 points are concerned with the health policy
within the EU, of which one relates to cooperation with the WHO (cooperation with the
Framework Convention on Tobacco Control and in implementing the IHR). In the section
on external relations, “multilateral cooperation” and “human rights” are mentioned
only in brief (without reference to health), while a somewhat longer section deals with
“development policy”. Under this heading, “poverty related and sexually transmittable
diseases” are mentioned as just one subject area without any elaboration on this.
460
III. SCENARIOS – GLOBAL COOPERATION OR INCREASING GLOBAL HEALTH
CRISES?
Scenarios are meant to identify possible ways in which a complex system can develop,
in order to reveal points of reference from which policy-makers can take strategic action.
Since the full complexity cannot be illustrated here and is not ultimately of any real
signifi cance for these purposes, and since relevant policy decisions and the institutional
changes instigated or decided upon can rarely be predicted over the longer term, we can
only concern ourselves here with those “ideal types” of development deemed possible
based on the supposed dynamics of different constellations of stakeholders.
III.1 A comprehensive global health policy: improvement of the conditions for health
in poor countries and control of transborder problems
The fundamental importance of international health policy and in particular of improving
the health situation in poor countries has been emphasised in various contexts
in the last ten years (G7/G8; Millennium Development Goals; Commission on Macroeconomics
and Health). Scenario (1) is based on the following premises: by the year
2020, considerable progress has been made in the fi ght against HIV/AIDS and the goals
of improving health systems – in the broader sense, the fi ght against poverty – and in
establishing reliable systems of a global transfer of resources, as a kind of global revenue
sharing. This progress is supported by an infl uential global civil society.
The threat of the global spread of infectious disease has been reduced by a further
strengthening of the IHR. On top of this, increasing account has been taken of the fact
that one cause of the emergence and spread of new epidemics are catastrophic sanitary
conditions, which in turn limit the possibilities of stopping an outbreak in the early stages.
At the same time, it has been recognised that, for any containment of HIV/AIDS to
be effective and for there to be any real stabilisation of the development processes in the
southern hemisphere, a health system covering the entire region and including all social
groups is required. In effect, then, it has been recognised that an appropriate transfer of
resources is in the rich countries’ well understood own interests. This ties up with the
historical experience of the industrialised countries, i.e. that a comprehensive system of
social security promotes political stability and further socioeconomic development.
In parallel with this, transnational norm-building processes have created standards
strengthening the concept of the human right to health (within the context of increasing
political acceptance of economic, social and cultural human rights overall). This has led

to a reappraisal of intellectual property rights along with new mechanisms for promoting
research into and development of products that are important for the supply of global
public goods.
The structures of a world confederation are emerging more clearly in 2020: on the
one hand, in line with the principle of subsidiarity, local and national competencies have
also been strengthened in the poorer countries, so that, in terms of health policy, public
authorities can ensure adequate minimum care for all. This is also being achieved
through close coordination with various transnational stakeholders who are providing
the necessary aid. On the other hand, there are elements of global statehood due to
a strengthening of international law, the further development of a global civil society
and the more binding nature and increased fl exibility of international cooperation. This
is secured on one side by pressure from civil society and on another by the complementary
forms of informal deliberations and mandatory decision-making bodies. The
contributions of private companies to social security in the sense of Corporate Social
Responsibility (CSR) are governed not only by appropriate political incentives and offers
of cooperation (for example, PPPs), but also by more intense transnational debate at the
level of civil society. The global participation of stakeholders with only limited power at
the national policy level improves cohesion at the global society level (one approach since
the beginning of the new millennium has been that of strengthening civil society through
the poverty reduction strategies of the World Bank). EU policy towards its new, less developed
members has served as a model for such a strategy for development and security
through integration. At the same time, the interdependence of different areas of global
governance has been more keenly recognised. It is true that poverty reduction strategies,
global environmental policy, the regulation of international trade and the implementation
of human rights continue to fall within the remit of various organisations, however
the discourses on the interdependencies of various regimes have become increasingly
institutionalised.
III.2 Limited cooperation: containment of global threats to health
Scenario (2) assumes a continuation of the trends currently being seen, particularly
that of a successful development of means of controlling infectious disease globally. The
G8 are continuing to concentrate on fi ghting these diseases, since this represents the
clearest threat to rich countries. More comprehensive models of fi nancing “health” cannot
be successfully pushed through because of the fi nancial “restraint” of these countries
and their primary focus on their own interests.
This also holds true for their position on intellectual property law. Countries with a
strong pharmaceutical industry are trying to undermine through bilateral trade agreements
the recognition of the TRIPS fl exibilities achieved. There are some attempts to
counteract the negative consequences of this policy in particularly critical areas (such as
HIV/AIDS) with generous programmes and, beyond this, to promote voluntary concessions
from the pharmaceutical industry, such as favouring poorer countries with differentiated
prices for drugs and participating in PPPs. Against the backdrop of the rich
countries’ aims of promoting their own economic interests and values (such as in the
case of PEPFAR, with the great reluctance to promote condoms in the fi ght against HIV/
AIDS), those multilateral agreements that are not, as in the case of the IHR, clearly in the
interests of these countries are losing ground.
461

Scenario (2) is based on the assumption that this policy approach will in fact, in
the medium term, be successful in averting larger-scale global health crises, but that
the trends towards unequal development will continue worldwide. The more successful
countries in East and Southeast Asia will succeed in developing their social systems. But
the willingness to support poor countries in this fi eld remains very limited. The development
of international civil society is also stagnating in terms of global social policy.
Initiatives in this area are losing momentum in the face of expected successes failing to
materialise, while conservative interests are increasingly managing to mobilise counterforces.
Within this context, global governance is only having success in those instances
requiring the coordination of measures to insulate the industrialised countries and more
advanced regions of the south from the consequences of extreme poverty.
III.3 A world society without global policy: the increasing threat posed by infectious
disease and disease-promoting conditions
Scenario (3) is a global crisis scenario. Global problems are tending to become uncontrollable.
Political confl ict in crisis regions is on the increase and is hampering the
consolidation of statehood, and thus also the development of health systems. Even in
countries still showing high rates of growth at the start of the new millennium, social
and political confl ict is now intensifying due to growing inequality; environmental and
health crises are also on the increase. These confl icts are in turn leading to stagnation in
the global economy, with it becoming ever more diffi cult to fi nance the existing standards
of care in the health services of the industrialised countries. The effi cacy of international
organisations such as the WHO and WTO (World Trade Organization) is being increasingly
blocked by confl icts of interest. Thus the WTO has become less signifi cant in the
face of a system of bilateral and regional trade agreements, since the rich countries are
not prepared to make any real compromises with the developing countries.
In view of the increasing levels of confl ict in poor countries and the lack of means of
control in regions of confl ict, the spread of epidemics cannot be fully halted and these
are now doing considerable damage in the industrialised countries too. After successful
containment of infections in the previous years, at some point between 2015 and 2020
the long-dreaded global fl u epidemic breaks out as a result of the mutation of a virus in
the densely-populated Niger delta. Beginning around 2010, the resistance of pathogens
to existing drugs for treating malaria and tuberculosis had been increasing in many regions
of Africa. The programmes to combat HIV/AIDS are proving only partly successful
and large numbers of people are dying because their continued treatment cannot be
fi nanced. The burden on the health systems in many poor countries is becoming ever
greater, while aid from Europe and the US is diminishing due to the global recession.
Through tourism and, in particular, migration, the incidence of tuberculosis is also rising
considerably in the rich countries, with resistance becoming an increasing problem with
this illness too.
On the whole, it seems most likely that, in the short to medium term, the second scenario
will materialize. Given unfavourable conditions, however, a sudden metamorphosis
into the global crisis scenario, which leads to a vicious cycle, cannot be ruled out. This
would be most likely to happen if political confl icts were to hinder successful cooperation
within the context of the IHR. However, the fi rst scenario need not remain a mere utopia
if international cooperation can successfully be developed beyond responding to acute
462

threats. An essential requirement for this, however, would be a more positive attitude
towards multilateralism and a greater willingness on the part of rich countries to make
economic compromises, not only in the sense of “simple” transfers of resources, but also
in relation to mechanisms for controlling the global economy (TRIPS, GATS) and in accepting
their responsibility for providing global public goods for health.
IV. POLITICAL OPTIONS: VISIONS AND RESOURCES
Germany’s international health policy remains very strongly oriented towards the
spread of infectious disease, not only in terms of the German research capacities allocated
to this, but also in respect of the focus on how to respond to possible threats. This
approach is however no longer appropriate (if it ever was) for the great challenges posed
by global health. It is an absolute must, then, that a paradigm shift takes place, which
sees health policy as a policy for implementing a social human right and for strengthening
social integration, including that of global society. This new approach would be an
appropriate response to the international scientifi c and political discourses being held
in the past few years as to the meaning of “health” in global policy. With regard to this,
much greater resources are required than have hitherto been provided, both to revive the
discourses within Germany and to ensure greater participation of German scientists and
politicians in international discourses.
Given the considerable importance of global health policy, German policy should in
turn give it signifi cantly more weight. In terms of the well understood German interests,
it is not suffi cient to concentrate on defending against health threats to Germany. Supporting
the traditional strengths of German tropical medicine is certainly a key factor
for helping in the fi ght against neglected diseases, but this can only lead to effective
advances if the fi ndings are incorporated into a more comprehensive policy for improving
healthcare provision in the countries affected. It is not enough simply to comply with
those international obligations that are more or less formally established (contributions
to the regular budget of the WHO, contributions to the Global Fund).
Many interests regarding the developing countries are ultimately world order interests
that also encompass social and health policies in other parts of the world. It should
be borne in mind that this is ultimately about global regulatory policy, i.e. not a “soft”
world order with no armoury of possible sanctions, but about the foundations of binding,
global rights and obligations. If one thinks of the international policy of promoting good
governance and its connection to poverty reduction strategies (see Scenario (1) above),
this is not as utopian as it perhaps at fi rst sounds. The development of democratic systems
fi rst requires fundamental social change, which is based on the everyday interests
of the people concerned.
Two areas of global health policy are of central importance if the course is to be set in
the direction of Scenario (1) as a long-term objective: on the one hand, the strengthening of
national health policy in the poor countries (using the mechanisms of global health governance)
and, on the other, the mobilisation of suffi cient fi nancial transfers. As the Commission
on Macroeconomics and Health has convincingly argued, these amounts are certainly
considerable, but are well invested given the possibility or achieving considerable progress
in development in the medium to long term and saving on treatment costs. The health-related
Millennium Development Goals can be seen as benchmarks in this respect.
463

Developing Global Health Governance structures can, as shown, mobilise additional
resources, open up opportunities for participation and improve the position of poor populations
through advocatory activities. The entry of new stakeholders, however, creates
considerably greater complexity. This brings with it the problems of how to rationalise
the allocation of these resources, which often overstretches the organisational capacities
of the recipient countries. Similar debates in other areas of development cooperation
have led to an international discourse on the basic effectiveness of aid and to the Paris
Declaration on Aid Effectiveness. Properly functioning health systems can only be developed
if the recipient countries themselves have effective control over the funds through
national authorities, with simultaneous strengthening of local competencies.
It is also important that the WHO be strengthened again – and indeed particularly
in its role as initiator of new discourses and, as the case may be, subsequent negotiations:
this happened, for instance, in 2004–2006 with the Commission on Intellectual
Property Rights and Innovation in Public Health, giving rise to initiatives regarding negotiations
on a Global Framework on Essential Health Research. A defi nite requirement
would be a more active German participation in the Commission on the Social Determinants
of Health with the prospect of an initiative to promote health and well-functioning
health systems in poor countries (including not only decentralised insurance systems,
but also the development of concrete forms of international fi nancing) and improve the
framework conditions for health (access to clean water, sanitary facilities, etc.). Any such
strengthening of the role of the WHO as a forum for global health policy demands greater
commitment to providing voluntary contributions.
Despite all the debates about the fi nance required to effectively improve the health
situation in poor countries, the concrete political initiatives so far have concentrated on
the G8 and the fi ght against infectious disease. Given the shortfall in fi nancing the Global
Fund, any such expansion of the horizon in terms of negotiations seems unrealistic.
Nevertheless, given the set of problems outlined here surrounding global health, it seems
that this will be inescapable in the medium term. When this happens, the fact that there
are indeed considerable synergies between the fi nancing of “health” and the fi nancing of
the fi ght against HIV/AIDS must be taken into account.
In the short term, the German EU and G8 presidency offers opportunities to take
the initiative in this area. This chance should under no circumstances be thrown away.
A leading role should defi nitely be taken not just in solving internal problems of the European
Union and the North Atlantic region. Also, in terms of intellectual property law,
the aim should not be just coordination with the US in order to push through particular
economic interests in the face of China and India – it is just as necessary to incorporate
the issues relating to TRIPS and the access to drugs.
The EU Parliament adopted two notable resolutions on HIV/AIDS 15 last year. These
require the provision of additional fi nancial aid, in order to secure, among other things,
the aim of universal treatment of those infected with HIV by 2010 and to ensure longterm
treatment of all patients, to strengthen public health services and regional and national
production capacities for generic drugs and to simplify the procedures for granting
compulsory licences. These are promising attempts in the direction of an EU strategy on
15 Cf. European Parliament Resolution on HIV/AIDS: Time to Deliver of 6 July 2006 (http://
www.europarl.europa.eu/sides/getDoc. do?objRefId=124436&language=EN) and European Parliament
Resolution on World AIDS Day of 30 November 2006 (http://europa.eu/bulletin/en/200611/
p129006.htm).
464

Global Health Governance which in turn could serve as points of reference for initiatives
on the part of the German government. Placing emphasis on these areas could herald the
start of a new era of EU global health policy.
In terms of the G8 too, the provision of global public goods should have priority over
national and sector-specifi c interests. The German presidency should not only solidly
support the commitments to the fi ght against HIV/AIDS already made by the G8 since
1999, but also set an important political agenda by expanding these activities to the promotion
of health in general.
The mobilisation of huge resources to improve the global health situation, one effect
of which would be easier control of infectious disease, is of course a long-term project.
Yet if such a project were initiated and pursued vigorously, this would make it possible
for Germany to assume a strong role in international health policy and to incorporate
more effectively the promises of its own medical research into any global policy. Admittedly,
in the international health policy fi eld, strong instruments would then have to be
developed to ensure effective coordination between the various government departments
involved. Switzerland has begun developing target agreements on foreign health policy
between all departments concerned. This could also represent a fi rst step in the right
direction for German policy.
A comprehensive health policy of this kind can be incorporated into a framework of
resolute international cooperation to achieve the Millennium Development Goals and is
in principle also required by the International Covenant on Economic, Social and Cultural
Rights, which is in fact applicable international law. Such a policy is also in the well
understood interests of the OECD countries.
On the author: Wolfgang Hein is Extraordinary Professor at the University of Hamburg and Head of the
Research Area “Transformation in the Process of Globalisation” at GIGA, the German Institute of Global and
Area Studies in Hamburg.
465

466
ENERGY SECURITY
Dietmar Dirmoser
This article authored by Dietmar Dirmoser was originally published by Friedrich-Ebert-
Stiftung, Department for Development Policy, Berlin, 2007
ABSTRACT
The subject of energy security was absent from the political agenda for almost two
decades. This situation changed when the price hikes of recent years revealed shortages
and supply bottlenecks and interruptions in delivery became easier to envisage. This
caused many countries to resort to national security strategies. A race for access to oil
and gas began that could easily escalate into a “new Cold War” for energy or into a “Hot
Resource War.”
Most countries in the world are reliant on imported energy. Future development will
largely be determined by the anticipated shift in production locations. The importance of
the regions in the “strategic ellipse” from the Persian Gulf to the Caspian Sea to Northwest
Siberia in supplying the world with gas and oil is growing as production in OECD
countries falls. In 2020, one half of oil and gas production will come from countries
currently rated as high-risk. Thus energy security will also depend on whether tensions,
crises, and international confl icts adversely affect the fl ow of investments and resources.
Neither a diversifi ed energy mix nor increased use of renewable energies nor greater
energy effi ciency can render the international security of nations and regions immune
to the state of the international system. Even if a decision were taken today to drastically
reduce the use of fossil energy, there would be no energy security for a transitional period
of several decades without suffi cient supplies of oil and gas from risk regions. This
means that no consuming state can dispense with a foreign-policy energy strategy for the
foreseeable future.
This kind of strategy can have a resource-nationalism orientation and emphasize bilateral
or coordinated energy procurement diplomacy, but it can also include the application
of pressure. A number of states have chosen this option and if this approach prevails, it is
likely to result in stronger states exerting their infl uence at the expense of weaker ones.
A strategy can also take a multilateral approach aimed at making the international
energy system equally advantageous for exporting states, large-scale consumers, and
newly-industrialized and developing countries. But in this process two fairly new developments
need to be considered. On the one hand, the balance of power between the
main actors in the international energy system has shifted: the listed energy corporations
in the West no longer dominate the scene; rather the national energy companies in the
producing countries control production and reserves and these in turn are controlled by
governments and will keep Western corporations at a distance.
On the other hand, the attempts by OECD states to impose on the international energy
system a liberal regulatory framework favorable to the industrialized nations have
failed. If the world is not to disintegrate into two opposing blocs and groups of nations, a
new attempt must be made to negotiate the development of a governance structure that

is acceptable to producing and consuming countries alike. Two scenarios describe the
differences between a world of resource nationalism and a world whose energy system is
based on multilateral regulations and balance mechanisms. Germany has the potential to
assume a key role in the multilateral scenario.
I. NEW GEOPOLITICS AND ENERGY SECURITY
After the shock waves of the 1973 and 1979/80 energy crises had receded, the subject
of energy security disappeared from the political agenda for almost two decades. It
was left to the private corporations to secure energy supplies and they reliably provided
adequate quantities wherever energy was needed. There were no sudden supply shortages,
interruptions of supply were inconceivable, and prices were low. When in 1998 oil
prices (and the gas prices coupled to them) began to rise following a dramatic fall to a
“historical” 9.50 US dollar per barrel, nobody was at fi rst perturbed. But prices continued
to climb. In 2000 they had more than tripled and there were mass protests against the
resultant rise in petrol prices in several EU countries. The next massive price increase
occurred in 2002, and in July 2006 a barrel price of 78.40 US dollars documented the
highest nominal rate ever reached. 1
By then, however, under the infl uence of ever increasing headlines prophesying doom
and disaster, the prevailing view was that securing energy supplies was one of the central
political challenges of the new century and would remain so in the long term. Robert
Skinner of the Oxford Institute for Energy Studies (OIES) stated that the 15–20 year timeout
period for energy security policies was now well and truly over. 2 In their attempts to
secure energy supplies, governments everywhere are relying on national energy policies
often implemented in opposition to or competing with other countries since viable and
effective multilateral cooperative approaches to secure energy supplies do not exist. Added
to this, the market economy concept of the international energy system is increasingly
being challenged. State intervention in the energy sectors of key export countries occur
more frequently, and re-nationalizations and in some cases nationalizations are occurring.
The politicization and sometimes even militarization of energy relations is gaining
impetus in important consumer countries. The new unilateralism and increase in state
intervention have triggered a cost-boosting race for access to oil and gas stocks and have
set in train a risky “game” involving a resurvey of the world. Fears of an impending “Cold
War” over energy and the danger of hot “resource wars” are prevalent. 3
Regardless of how topical the subject of energy security has since become, the question
remains as to what contribution the multilateral system and, more specifi cally, Europe
can and should make to meeting the new challenges. There is no legal basis for a
1 Adjusted for infl ation (2004 dollars) the barrel price at its historical peak in January 1980 was
well above the current level of 94.30 US dollars. (James L. Williams: Oil Price History and Analysis,
WTRG Economics. Energy Economist Newsletter 2005; accessible at: www.wtrg. com/prices).
2 Robert Skinner: Strategies for Greater Energy Security and Resource Security, Oxford Institute
for Energy Studies. Background Notes, June 2006, p. 3 (accessible at: www.riia.org/sustainabledevelopment).
3 Sascha Müller-Kraenner: Energiesicherheit. Die neue Vermessung der Welt, München 2007,
pp. 37ff; Frank Umbach: Europas nächster kalter Krieg. Die EU braucht endlich ein Konzept zur
Versorgungssichereheit, in: IP (International Politik) 61, No. 2, pp.. 6ff; Spiegel Spezial 5/226:
Kampf um Rohstoffe. Die knappen Schätze der Erde, Hamburg.
467

common European energy policy. Responsibility lies with the individual member states
and attempts by the Energy Commissioner to coordinate the policies of 27 states and
direct them towards common strategic objectives are continually being undermined by
resource nationalism on the part of the individual member states. It is quite obvious that
many countries have opted for direct economic, political, diplomatic, and perhaps also
military “persuasion.” Cooperative efforts, either in the European context or with the aim
of creating multilateral governance structures directed at secure energy supplies for all,
are not seen as a priority for achieving security of supply. Neo-realistic tendencies are
frequently being resurrected in the application of energy relations and these are directed
at the expansion of infl uence and the development of positions of power, with cooperation
being sought only if it appears to offer advantages.
The requirements of environmental protection, however, are impinging on these unilateral
tendencies in energy foreign policy. Not only is the need to reform national energy
systems emerging from the ever broadening political consensus that global warming is
a pressing problem for the international community, but also the need for more international
cooperation on energy matters.
The relevant scenarios reveal that fossil fuels will be vital for energy supply for decades
to come, yet environmental protection is not possible without a realistic cut in the
use of fossil fuels and without the development of alternative energy sources. Energy
systems must be radically reformed and the pollution of the atmosphere by greenhouse
gases reduced in every national system (by increased energy effi ciency, diversifi cation of
energies used, development of renewable energies, and improvement of the environmental
compatibility of fossil energies by technical advances). But all national environmental
protection measures will remain futile without the cumulative effect achieved by broad
international cooperation and coordination. “The internal and the external must be one,”
emphasize Wolfgang Sachs and Hermann Ott. “It is no longer possible for effective foreign
policy to confi ne itself to defending so-called “national interests”: via a number of
feedback and cascading mechanisms, national interests today embrace the wellbeing of
everybody on this planet.” 4
All energy concepts – whether the EU Commission’s Green Paper of March 2006, the
US Government Energy Plan of 2001, or the German or Japanese governments’ position
papers – have a three-goal dimension: economic, environmental, and security-policy. 5 In
Japan this is termed the three E’s: energy security, environmental protection, and economic effi
ciency. The German formula is almost identical: an energy policy should bring about security
of supply, environmental compatibility, and economic effi ciency. The three dimensions
are interrelated and each on its own involves much more than the energy problem alone.
The present article does not offer a broad analysis of the energy problem and the
various aspects of energy policies with all the interconnections involved, but concerns
solely energy security. Thus the analytical focus is on only one of the three dimensions in
the triangle of objectives. This does not mean that the scope of the issue is being unduly
narrowed, however; it is simply an attempt to make a clear analytic distinction between
the various layers of the problem, which are often confused in debate. Thus, for instance,
4 Wolfgang Sachs/Hermann Ott: Öljunkies auf Entzug, in: IP (Internationale Politik), 62, No.
2, February 2007, p. 14.
5 Commission of the European Communities: Green Paper. A European Strategy for Sustainable,
Competitive and Secure Energy, Brussels 8.3.2006 (COM(2206) 105 fi nal); National Energy
Policy Development Group: Reliable, Affordable and Environmentally Sound Energy for America’s
Future, Washington 2001.
468

environmental protection, if it leads to a reduction in the use of fossil energies, can impact
on countries’ energy security situation, but environmental protection does not automatically
lead to energy security, at least not in the short or medium term. An increase
in energy effi ciency (involving a “domestic energy source”) can undoubtedly infl uence
the security of energy supply. But in the short or medium term, it does not automatically
result in energy security: even if a political decision were taken today to reform the energy
system in the direction of a dramatic reduction in the use of fossil energy – which
is not likely – there would be a transitional period of several decades with a energy security
problem resulting from the relationship, tensions, and problems between the small
group of countries producing fossil energies and various groups of consumer countries.
The level of action chosen thus depends on the time perspective envisaged. In the short
term, energy security is linked to the management of sudden supply shortages. In the
medium term, it is concerned with the setting up of regulations and a governance structure
for the international energy system and the management of confl icts with deeper
implications. In the long term, energy security is also dependent on how climate change
is handled and on ways of dealing with the prospect of depleting oil and gas reserves
and on progress made in the technological reorganization of the energy system. As the
measures to tackle long-term problems have no effect on the short- and medium-term
problems to be solved, this vital sector is not included in the approach adopted here.
Hence the pragmatic defi nition of energy security used in the Clingendael Report
will serve as the basis for what follows. This refers solely to the short- and medium-term
perspectives. According to the defi nition of this study carried out by the Clingendael
International Energy Programme (CIEP) in the Hague for the EU (DGTREN), energy security
is understood to be the minimization of the risk of energy crises using the tools
of politics. 6 In this context energy crises are prolonged disturbances of the balance between
supply and demand that provoke price leaps and negative repercussions for the
economies affected. Energy security policy aims to prevent supply bottlenecks and even
interruptions in supply. This involves not only crisis management and geopolitics, but
also sustainability in the way international markets are designed and in terms of security
architecture. Prior to a detailed discussion of political options, scenarios, and the available
courses of action, however, we shall fi rst take a look at structural changes and more
recent development trends in the international energy system.
I.1 Structures, Transformations, and Trends in the International Energy System
One thing most states have in common is that they cannot cover their energy requirements
from their own sources. An overwhelming majority of the 193 countries in the world
rely on a dwindling group of exporting countries that have an abundance of energy resources.
Oil and gas show the most marked imbalance. Most exportable production and
usable reserves are accounted for by the unstable regions in the “strategic ellipse” stretching
from the Persian Gulf to the Caspian Sea and North West Siberia, and the importance of
this region will grow with the depletion of the oil and gas reserves in the European OECD
countries. Reserves of coal, on the other hand, are equally distributed around the globe. 7
6 Clingendael International Energy Programme (CIEP): Study on Energy Supply Security and
Geopolitics. Final Report, The Hague 2004, pp. 36 ff.
7 But not even major exporting nations are independent of external energy supplies. Russia,
for instance, has to import electricity, natural gas, and coal; Iran petrol; and the United Arab Emirates
petrol and natural gas.
469

The international energy system acts as intermediary between supplies concentrated
in a few countries and broad demand. A gigantic machinery of energy production,
processing, and distribution supported by annual investments in the triple-fi gure billion
range ensures that every year four billion tonnes of liquefi ed, 4.6 billion tonnes of solid,
and 3,000 billion cubic metres of gaseous energy carriers are available 8 and are conveyed
from their production sites to consumers often far away. Barely one third of primary energy
production worldwide is traded interregionally and 60% of crude oil production. In
terms of value, trade in energy accounts for 10% of world trade. Interdependencies within
the international energy system are on the increase, something that is demonstrated inter
alia by the fact that energy trading is growing considerably faster than energy consumption.
9 Energy prices and oil prices in particular are regarded as key economic prices. 10
Financial transactions linked to the energy sectors are a major factor in the international
monetary and fi nance system on account of their size alone. The market for “paper
oil” that developed in the 1980s with the futures contract markets in New York, London,
and Singapore was originally used by market participants for hedging.
Yet recent years have shown that the expectations, assumptions, and speculations of
investors in themselves can be the cause of volatility. An amount in the form of futures,
options, and other derivates several times higher than the actual quantity of crude oil
(“wet barrels”) is traded on stock exchanges today, 90% by hedge funds and investment
banks which have nothing to do with the oil industry and usually hold their paper oil
only for a short period. Market observers talk of a fi nancial market bubble in paper oil,
with the total amount invested in oil futures rising between 2000 and 2006 from 40 billion
to 140 billion US dollars. The fact that in recent years there has been an increasing
tendency to make “bets” on high oil prices has driven up the prices for oil actually traded.
Some analysts estimate that the “speculative component” in current oil prices accounts
for over 20 US dollars per barrel. 11
The most important energy carriers, such as oil, coal, and gas, are freely traded internationally,
although this is not safeguarded by international agreements. Free trade does
not mean that the markets involved are perfect markets, however. On the contrary, on
8 Federal Ministry of Economics and Technology: Energiedaten. Nationale und International
Entwicklung, Berlin 2006; T 33 ff (accessible at: www.bmwi.de/Navigation/Techniologie-und-Energie/Energiepolitik/Energiedaten.html.
9 European Commission, Directorate-General for Energy: Energy in Europe. Economic Foundations
for Energy Policy (The Shared Analysis Project); Special Issue, Luxemburg, December 1999,
p.38; International Energy Agency: World Energy Outlook 2002, Paris 2002/2, p.70f.
10 One group of experts, including Joseph Stiglitz, is of the opinion that high energy prices
are a highly effective economic brake. This would seem to be borne out by, for instance, the global
economic slumps in the mid 1970s, early 1980s and 1990s being preceded in all instances over an
interval of one year to eighteen months by a sharp increase in oil prices. Another group points to
the fact that industrial nations today need 40% less oil for each dollar they earn than in the early
1970s, meaning that IT and service-based companies today are far less susceptible to leaps in oil
prices. Individual experts even consider high oil prices to be growth stimulating: Andrew McKillop,
for instance, in an analysis for STEM, the Swedish energy agency. McKillop demonstrates that
when prices rise the demand for oil increases rather than decreases and stimulates growth. A.
McKillop: Price Signals and Global Energy Transition; Ms 2004.
11 Cf. Mineralölwirtschaftsverband e.v.: Preisbildung am Rohölmarkt, Hamburg 2004, pp. 35ff;
Willi Semmler: Was den Ölpreis bewegt; Spiegel Online, 3.8.2006. The Economist speaks of a “fear
premium” of between 10 and 15 US dollars (The Economist, 5.1.2006).
470

energy feedstock markets distortions caused by cartels, oligopolies, subsidies, and institutional
defi cits are more widespread than on other markets. 12 A particularly aggravating
factor is that on fuel markets an effective allocation of resources is made diffi cult by restrictions
on investment possibilities and technology fl ows: monopolist state enterprises
in both production and consumer countries or equally monopolist “national champions”
with state support use their strong position to curb competition.
Despite all the asymmetries, market distortions, and price surging tendencies, the
international energy system has functioned tolerably well for some time. This even applies
to the current high-price phase which in the view of most experts is not an energy
crisis: the balance between supply and demand is not permanently disrupted, there is
no sustained volatility, but a gradual dropping of prices which are currently 20% lower
than in the previous year. 13 The major disruptions to production occurring since 2003 in
Venezuela (due to strikes), Iraq (war), and Nigeria (political instability), and those caused
by Hurricane Katrina did not lead to serious shortages in supply.
Because of their reserves and the fl exibility of their energy systems, many states that
are dependent on imports were able to weather not only supply bottlenecks but also
temporary total breakdowns in supply. Nonetheless, developments in the international
political energy economy can be observed since the 1990s that indicate an increase in the
threat of an energy crisis. These include in particular (a) an inadequate expansion of supply
in the low-price phase, (b) a dramatic rise in demand from the newly industrialized
nations, (c) growing dependence on fossil fuels, and (d) geographic shifts in supply and
a growing concentration on countries in the “strategic ellipse.”
a) Tight Markets
In the low-price phases of the 1980s and 1990s, there was scant investment in expansion
of supply and in refi nery capacities, although demand was constantly rising. One of
the widespread convictions about the international energy system included up to quite
recently the idea that there was a surfeit of energy (particularly oil and gas) and that
there was no problem for large international companies (Majors) to maintain equilibrium
between supply and demand. It was recalled that in the 1980s, industry had forced OPEC
to its knees by expanding supplies from deposits outside the cartel (North Sea, Gulf of
Mexico, Alaska, West Africa) and thus brought about a drastic drop in prices. After the
demise of the Soviet Union they could additionally resort to the Russian and Central Asia
reserves not available to them hitherto.
Low prices and growing pressure from the fi nancial markets and shareholders seeking
high short-term gains – although investments in the energy sector should be longterm
and have a longer “maturity period” – caused the Majors to concentrate in the 1980s
and 1990s on oil that was cheap to extract. There was little incentive to develop small,
remote fi elds with complicated conditions and high development costs, although it was
12 According to UNDP (World Energy Assessment. Energy and the Challenge of Sustainability,
New York 2000, p. 24) the fi nancing of world energy production is a sector in which there is massive
government intervention: fossil fuels and nuclear energy were subsidized worldwide by public
funds in the mid 1990s to the tune of 250–300 billion US dollars annually.
13 On the subject of the term “equilibrium” see Frank Hahn: On the Option of Equilibrium in
Economics, Cambridge 1973. Equilibrium is assumed when market signals (prices, restrictions on
quantity) do not force the actors to adjust their either concepts of reality (theories) or their strategies
(policies). According to this theory, volatility and market equilibrium are opposed.
471

ecoming apparent that these would be needed in the foreseeable future to replace the
slowly depleting major fi elds. And since high profi ts could not be obtained from investment
in refi neries, there was a long period during which no new refi neries were built
at all. 14 Despite considerable efforts, several large companies were not able to remain
competitive in this phase.
Texaco and Gulf were swallowed by Chevron, Amoco and Arco by BP, Petrofi na and
Elf by Total, and Mobil by Exxon. Even BP is now seen by stock exchange analysts as a
potential take-over candidate. The way the Majors have aligned their investment policies
to shareholder values has ultimately led to international spare capacity dropping to the
lowest mark for the past 30 years, 15 and to refi nery capacities 16 falling simultaneously.
The market has narrowed and is seen as “tight.” Occurrences such as hurricanes, disasters,
assassination attempts, unrest, civil wars, and international tensions can cause
nervousness on the markets and thus trigger massive price surges, as in October 2005
when one third of the US loading and refi ning capacity was lost due to hurricanes. And
when problems occur simultaneously at several points in the system, supply bottlenecks
have to be reckoned with.
b) Demand Surge from Newly Industrialized Nations
High growth rates and successful developments in several newly industrialized nations
have also contributed to a narrowing of the market. This has caused world demand
for energy, and in particular for oil and gas, to grow more strongly and rapidly than most
actors had anticipated.
China, Asia’s largest oil producer, meets two thirds of its energy requirements by
coal. But in parallel with an economic boom that has lasted now for 25 years, its energy,
and in particular oil, requirements have risen. In 1993 China had to import oil for the fi rst
time. China is now the second largest oil consumer after the USA, and its import requirement,
currently at 40%, is showing two-fi gure growth rates. From 2010 on China will also
be dependent on imports of natural gas. 17
14 c.c. Michael T. Klare: Statement on Energy Supplies in Eurasia and Implications for U.S.
Energy Security before the U.S. Senate Committee on Foreign Relations, Subcommittee on International
Economic Policy, Export and Trade Promotion, 27 September 2005; Robinson J. West: Testimony
on Energy Security before the U.S. Senate Committee on Commerce, Science and Transportation,
21 September 2005. West is Chairman of PFC Energy, a former investment banker, government
consultant, held high-ranking positions under Presidents Reagan and Ford, and is reputed to
be one of the architects of the US offshore oil policy.
15 During several periods in the 1980s and 1990s OPEC reserves, particularly those of Saudi
Arabia, had a buffer function on swings in demand. In 1985, OPEC had a spare capacity of 10 million
bpd that could be activated or deactivated as required. In the meantime, reserves have shrunk
to 1–2 million bpd as the difference is required to cover increased demand. Bassam Fattouh is right
in emphasizing the decisive question as being who should bear the costs of keeping reserve capacities
(Spare Capacity and Oil Price Dynamics, in: Middle East Economic Survey, Vol. XLIX, no. 5, 30
January 2006). The Majors are apparently not willing to do so, since keeping capacities for minimal
use is hardly reconcilable with a shareholder-value orientation.
16 In 1999 these amounted to over 6 million bpd according to PFC Energy and plummeted to
around zero in the following years. Investments in transport infrastructure (tanker fl eets, pipelines)
did not keep pace with growth in demand either.
17 Heinrich Kreft: Chinas Politik der Energie- und Rohstoffsicherung als Herausforderung für
den Westen, in: IPG (International Politik und Gesellschaft), 2/2007, pp. 48ff.
472

In addition to China, India and other newly industrialized and developing countries
are also contributing to the current surge in demand. None of the relevant energy agencies
and neither the Majors nor OPEC recognized demand trends early enough to be
able to react and thus prevent the rapid constriction of the market witnessed in recent
years. 18
According to the reference scenario of the International Energy Agency (IEA), almost
50% more energy will be needed by 2030 than is the case today. Over 70% of the
additional requirement will be due to countries outside the OECD. 19 Here per capita
consumption in the growing population will continue to rise parallel to successful
growth and progress in development, whereas in the industrialized nations the additional
requirement will be covered to a signifi cant extent by energy saving and improved
energy effi ciency. 20
c) Growing Dependencies
The IEA trend scenario assumes with growing consumption a higher dependence on
fossil energy, increased dependence on imports, and dependence on a dwindling group
of exporting states.
According to this scenario, 21 current reserves of fossil energy carriers will continue to
be suffi cient to keep the global economy moving in 2030. The Paris agency believes it to
be quite likely that, with prices rising moderately, there will be enough investment in the
maintenance and expansion of production capacities to balance supply and demand for
primary energy. Nevertheless, all the main risk factors concerning energy security will
not only continue but will increase, as described below.
This is initially the case because world consumption of primary energy is growing
as though supplies of fossil energy carriers were unlimited and climate change was not
occurring. By 2030 it will increase globally by 1.6% annually – in OECD Europe by 0.6%.
In Germany, however, it has been uncoupled from economic growth since the 1990s and
will drop by a further 10% by 2020.
There is not much likelihood of the worldwide high degree of dependence on fossil
energy carriers changing much either. One third of overall demand for primary energy
consists of one third oil, one quarter coal, and one fi fth gas; 13% renewables can be added
to this, including commercially utilized and non-utilized biomass and hydropower, plus
6% nuclear energy and 2% hydropower. According to the IEA reference scenario, the
share of fossil fuels – currently at 80% – will increase marginally, although a drop in oil
consumption is anticipated. Coal and gas consumption will increase, however. An valorization
of coal can be expected, since coal supplies are much greater and more evenly
distributed than oil and gas reserves. In China and India the consumption of domestic
coal in particular will grow by 60% by 2030, and in Russia and USA a clear increase in
18 Trend forecasts for the international energy system are generally surprisingly unreliable. The
oil price development predictions of the past fi ve years were, for instance, all wrong; not one of the
20 leading analysts from US banks and the raw materials industry predicted the tripling of prices
that took place after 2002. c.f. Udo Rettberg: Öl-Experten geben Entwarnung, in: Handelsblatt No.
134, 14.7.2006.
19 International Energy Agency: World Energy Outlook 2006, Paris 2006, p. 68.
20 The industrial nations with one fi fth of the world population currently account for one half
of the world’s energy resources.
21 IEA: World Energy Outlook 2006, loc. cit., pp. 53ff.
473

consumption is also expected. 22 If no progress is made in making coal combustion more
environmentally friendly by using modern technologies, there will be a sharp increase in
the emission of environmentally harmful gases and the likelihood of reaching climatechange
goals will retreat into the far distance.
The growing importance of natural gas in the international energy mix is due to power
stations in many countries being switched from coal or oil to gas because their combustion
emits fewer pollutants. But in the case of natural gas, this is a temporary solution at
best. With a statistical lifetime of 60 years, 23 gas supplies will outlast oil reserves, but gas
too will reach its maximum level of production within a few decades. Added to which
gas is expensive, as high investments in pipelines are protected by long-term supply
contracts which either fi x gas prices or tie them to oil prices. There will not be an international
gas market with free price formation until the development of an infrastructure
for liquid national gas (LNG) has made further advances and the separation of oil and
gas production and of oil and gas trading has been completed. 24 Because natural gas is
largely transported through pipelines, it is the energy carrier with the greatest dependence
between consumers and producers and hence susceptibility to crises.
Commercially exploited renewable energies, such as wind, solar, geothermal, and
tidal energy, will amount to only 2% of world primary energy by 2030 in spite of high
growth rates – in OECD Europe 4%. If the biomass and hydropower is include, the fi gures
rise to 14% and 15% respectively. By 2030 the share of renewables in providing electricity
and long-distance heating will grow worldwide to 13% – in OECD Europe to 21%. (In
Germany the share of primary energy consumption accounted for by renewables was
4.6% in 2005; it is expected to rise to 10% by 2020.) Even if progress is made, for reasons
of climate change or energy security, in further lowering the use of fossil energy and in
making much more use of renewable energies, energy security will not be attainable
without securing supplies of fossil fuels. 25
d) Geographic Shifts in Production
Developments are further complicated by signs of a shift in production locations.
A production plateau or onset of a decline in production is already under way in all
production areas for oil and gas outside OPEC, Russia, and some successor states of
the Soviet Union. Oil production in the USA is at the same level as in 1940, with a declining
tendency. North Sea oil is running out, Great Britain is already dependent once
more on imports. Thus the regions of the “strategic ellipse” from the Persian Gulf to
the Caspian Sea and North West Siberia are continuingly gaining in relevance for world
energy supplies. Just fi ve states – Saudi Arabia, Iran, Iraq, Kuwait, and the United Arab
Emirates – have over 60% of economically extractable oil reserves; in Europe, Norway
alone will be able to maintain its position as an energy power in the medium term.
22 Currently two thirds of the energy market are covered by coal in China, in India one third,
and in the USA one fi fth. In China three quarters of electricity supplies are from coal, and in the
USA one half.
23 World Energy Outlook 2002, loc. cit., p. 113.
24 Currently 20% of natural gas production is traded on an interregional basis. By 2020 it will be
45%. One quarter of gas traded is liquid gas or LNG. Cf. John V. Mitchell: Renewing Energy Security,
The Royal Institute of International Affairs, July 2002, p. 11; idem: A New Era for Oil Prices, The Royal
Institute of International Affairs, August 2006, p. 27 (accessible at www.chathamhouse.org.uk)
25 World Energy Outlook 2006, loc. cit.
474

The US Department of Energy estimates that by 2025, 32% of world oil production will
come from the Gulf Region, 13% from Africa, 14% from Latin America, and a further
14% from the states of the former Soviet Union. 26 Similar geographic shifts in energy
supply are visible for natural gas. One third of all proven gas reserves are in Russia and
the countries of the former Soviet Union, a further third in the Middle East, one half
of which is in Iran.
In several countries these shifts mean that their present reliance on imports for energy
supply will increase even further. Germany currently obtains (not counting uranium) 62%
of its energy requirements from abroad (97% of its mineral oil, 83% of its gas, and 61% of its
coal requirement). One half of the EU’s current energy requirement is covered by imports
and by 2030 the import share will rise to 70%. In the case of crude oil the import share will
rise to 90% by 2030. The EU’s imports of natural gas will double, for not only is production
within the EU declining, but at the same time the market share for natural gas in on the
increase. At the moment 54% of gas supplies are imported; by 2030 reliance on imports
will have risen to 80%. Dependence on individual suppliers will also grow. In the case of
Germany, the importance of Russia will continue to increase: 37% of Germany’s natural
gas supplies come from Russia 27 and 40% of gas imports for the EU as a whole – seven EU
states obtain 100% of their natural gas from Russia. Algeria, too, plays an important role for
supplies to Europe, with 30% of EU imports. It is connected to Italy and Spain by pipelines
and in the states of southern Europe has a market share of 40–60%.
e) Ways Out of Dependence
In security terms, high dependence rates and especially dependence on a few suppliers
is risky. The antidote would be diversifi cation, but the options are limited and not
very enticing. In the case of natural gas, alternatives to Russia and/or Algeria would be
Iran, the Middle East, and the states bordering the Caspian Sea. But import infrastructures
are oriented towards Russia, making this option merely theoretical – at least for as
long as there is no existing LNP infrastructure. On the other hand, none of the alternative
suppliers offer greater political stability and less supply insecurity than the present
major suppliers. Diversifi cation that does not include Russia is also diffi cult to imagine
as gas from the Caspian Region would probably be conducted by Russian companies
through Russian territory in order to get to Europe.
I.2 Peak Oil and Security of Supply
There is little doubt that consumption of energy and in particular oil will rise rapidly
over the coming decades. Experts do not agree, however, on how long oil and gas reserves
will last if supplies expand at the same rate.
The oil price explosion of recent years was seen by many as a prelude to an ultimate
oil crisis, in the course of which sooner or later “we would run out of oil.” Since the Shell
geologist King Hubbard correctly predicted in the 1950s that US oil production would
26 U.S. Department of Energy. Energy Information Administration: International Energy Outlook,
Washington 2005, R1.
27 Federal Ministry of Economics and Technology/Federal Ministry of the Environment, Nature
Conservation and Reactor Safety: Energieversorgung für Deutschland. Status Report for the
Energy Summit of 3 April 2006, Berlin 2006, p. 12.
475

each its peak in 1970 (peak oil) and then decrease, 28 , there has been disagreement on
when the physically inevitable zenith of global production would be reached, marking
the onset of a pronounced fall in production from this point on. 29 The adherents of the
peak oil theory see confi rmation for their assumption that we have already passed the
peak in the fact that supplies currently seem to react only weakly and haltingly to the
undoubtedly strong demand impulses. The US Department of Energy, for instance, calculated
an elastic reaction in supplies and set aside 24.1 million bpd for anticipated oil
production from Indonesia, Iraq, Nigeria, Saudi Arabia, and Venezuela.
In fact, the fi ve countries only achieved a daily production of 18.9 million barrels. 30
There are in addition a number of developments that “peak pessimists” like to use
as evidence. One of these is the fact that for several decades no really big fi elds like the
Mexican Cantarell complex or the legendary Saudi Ghawar fi eld have been discovered. 31
Today one half of global oil production comes from 102 fi elds with a daily production of
over 100,000 barrels which have been exploited for over 20 years; 14 giant fi elds that supply
one fi fth of world production have even been in operation for an average of 43 years.
All these fi elds are showing signs of depletion; production is falling – in some cases
dramatically. 32 Furthermore, for some time now twice as much oil has been produced
annually than new reserves found. 33 The reserves of most large private oil companies
today no longer grow by means of exploration and new projects but by mergers and
purchases. The quantities of reserves reported by some OPEC states are also possibly
exaggerated. In the 1980s, Abu Dhabi, Iran, Iraq, Saudi Arabia, and Venezuela reported
far greater new reserves than the actual quantity of oil found; OPEC quotas were based
on the amount of reserves.
The extent of concern aroused by these developments is, however, ultimately based
on belief. On the BP website, where the peak oil theory is classifi ed as “unsuitable” for
forecasting global oil supply, the experts are divided into three groups; the pessimists,
the optimists, and the realists. Peter Davies, BP’s chief economist and publisher of the
renowned Statistical Review of World Energy, belongs to the optimist group and is of
the opinion that oil will “never” run out. The geologists of the Association for the Study
of the Peak Oil belong to the pessimist group, as do the authors of numerous successful
28 According to King Hubbard, the progress of production in an oil fi eld can be described with
a bell-shaped curve. First, oil is extracted that is easily accessible and cheap to extract and the productivity
of the fi eld rises. After around one half of the reserves are depleted, from the depletion
mid-point, production becomes increasingly more diffi cult and expensive and output falls. Even
though economic and political factors can infl uence the form of the curve, it is still considered by
the adherents of the peak oil theory to be a satisfactory model for the development of world production
despite its conceptually weak statistical foundation.
29 Robert L. Hirsch: The Inevitable Peaking of World Oil Production, in: Atlantic Council Bulletin,
Vol. XVI, No. 3 October 2005.
30 Klare, loc. cit.
31 Shaybah, one of the newer fi elds, in operation since 1975, produces at half a million bpd
less than one tenth than the world’s biggest oil fi eld, the Saudi Ghawar fi eld, discovered in 1948
and with a daily production of 5.5 million barrels. Cantarell in Mexico produces 2 million barrels
per day.
32 International Energy Outlook 2002, loc. cit., p. 100f.
33 Cf. The Economist, 12 April 2006: Oil Companies. Improving Their Fieldcraft, see also: West,
loc. cit.
476

ooks, some of whom merely reshuffl e well-known indicators and present them in various
apocalyptic guises. 34
The decisive question to be asked in connection with reaching maximum production is,
however, how much oil is left. Current estimates are based on two of the total three billion
barrels still being available. According to most experts, economically extractable reserves
– those reserves calculated according to the America’s Securities and Exchange Commission
(SEC) defi nition of economic effi ciency which can be produced with current technology
– will last for 45–50 years. But since production for many companies is viable below
the economic effi ciency limit set by the SEC and companies are constantly developing new
reservoirs and extracting more from the fi elds with modern technologies, the lifetime of
reserves tends to be under- rather than overestimated. It was always be subject to upward
adjustment: in the 1980s it was 29 years, at present it is just under 50 years. According to
most studies the peak will be reached between 2020 and 2025 after which, after several
years of production at a plateau, world oil output will decline, possibly by one quarter in the
fi rst 20 years. 35 The timing of the production maximum and the length of the plateau will
be infl uenced by technological developments in fi eld exploitation, new fi ndings, the price
level, and government policies on promoting transitional and alternative energies.
From this we can conclude that the market today is not tight because the global production
maximum has been passed. Availability of reserves will not – for the time being
– stand in the way of an expansion of supply in pace with growing demand. The problem
of the production maximum nevertheless deserves attention, since one thing is sure:
there is not much time left. Calculations by the Washington consulting company PFC
Energy show that the oil branch could reach its plateau between 2015 and 2020 at a daily
production of 95–100 million barrels (2005: 82 Million bpd), 36 even if it proved possible
to utilize the value of heavy oil, oil sand, and shale oil and other unconventional fossil
fuels. 37 When the plateau has been reached and demand continues to rise, part of the
demand will either be eliminated by the price or will switch to any other sources available.
If this occurs at very short notice and unexpectedly, serious economic and social
34 Cf. inter alia Kenneth Deffeyes: Beyond Oil: The View from the Hubbard Peak, New York
2005; David Goodstein: Out of Gas: The End of the Age of Oil, New York/London 2004; Richard
Heinberg: The Party’s Over: Oil, War, and the Fate of Industrial Societies, Gabriola Island (Can.),
2005, 2. revised. and expanded edition, dt: Munich 2004; James Howard Kunstler: The Long Emergency:
Surviving the Converging Catastrophes of the Twenty-First Century, New York 2005; Matthew
R. Simmons: Twilight in the Desert. The Coming Saudi Oil Shock and the World Economy,
Hoboken 2005.
35 The Federal Institute for Geosciences and Natural Resources expects the production maximum
for conventional oil to occur between 2015 and 2020, while the US Geological Survey reckons
with a peak in 2024.
36 West, loc. cit.
37 Unconventional oil (heavy oil, sand oil, oil shale, deep-sea oil, polar oil, and liquid gas /
NGL) could not be produced cost effectively until recently and were not included in most reserve
estimates. Whereas one group of experts, including Robinson West, includes unconventional oil
in the lifetime calculation and does not expect any notable overall change, others expect technical
progress to make possible better exploitation of existing fi elds (enhanced recovery) and being able
to begin exploiting deposits hitherto untouched because of high extraction costs. If “expensive”
and above all “unconventional oil” is included in the calculation, there would be “ample reserves”
for the coming decades. Cf. Michael Bräuniger/Klaus Mathies: Langfristige Entwicklungen auf
dem Markt für Energierohstoffe, in: Wirtschaftsdienst, No. 8/2005, pp. 528ff.
477

upheavals can be anticipated. Oil will still be available and essential in the international
energy system for decades after the peak, yet from a certain point on, the oil sector will
lose its ability to react fl exibly to increasing demand and hence its function as a demand
buffer for the entire energy system.
Preparations for this situation are not yet far advanced. But slowly the debate is
changing. BP is starting to present itself as “beyond petrol,” President Bush has made
a pledge to overcome America’s “oil addiction,” and in many quarters billions are being
invested in the development of energy technologies for the low-oil age, even though this
is only a fraction of the 20.000 billion US dollars that the IEA calculates will fl ow into energy
supply with fossil energies in particular by 2030. The leisurely pace at which those
responsible are acting borders on negligence. The fact that data on known reserves are
unreliable does not mean that the pessimists are wrong and that the limited supply of
geological resources is not a problem. We just do not know when exactly the problem
will become apparent. If a risk cannot be excluded, it is logical to invest suffi cient sums
in precautions, something governments and individuals do automatically in the case of
other risks. States maintain armed forces, for instance, not because they know a war will
occur but because the consequences would be disastrous if it did occur and they were
not equipped for it.
If the peak is reached earlier than expected, the world will drift into a chaotic transitional
phase. Robert L. Hirsch, a seasoned energy expert with no tendency to apocalyptic
visions, has supplied details on how this might develop in a report for the US Energy Department
that submits all existing studies on peak oil to secondary analysis. 38 The Hirsch
Report calls on those responsible to face up to this “classic risk management problem.” His
recommendation: damage limitation should be started as soon as possible, as at least 10–20
years of intensive effort on the supply and demand aspect are called for prior to attainment
of the production peak if the necessary changes in the international energy system are to be
effected. A broad-based preventive program of this kind is so far without precedent.
478
I.3 The Shift in the Balance of Power between Energy Market Actors
There are few markets that exhibit such grave distortions as the international energy
market, in which cartels, oligopolies, subsidies, and government intervention determine
developments. Key market functions are fulfi lled in spite of this, since the international
energy system has so far ensured that demand impulses meet production, and investment
in energy resources is suffi cient in order to produce and start trading with the quantities
that are required to cover global import needs. This is not usually at competitive
prices. Costs of production average approx. 10 US dollar per barrel, and in the Middle
East less than half of that, but the market price, geared to the most expensive producer,
is currently between 60 and 70 US dollars. The difference – in oversimplifi ed terms – is
described in theory as an economic rent and would not exist without the cartel policy and
the oligopolistic structures.
For many decades Western energy companies were not only the dominant protagonists
of the international energy market but simultaneously the bodies that owned the largest
proportion of energy rents. This made it easier for key market participants such as the USA
and the EU states to accept reliance by their energy systems on an economic and trade sys-
38 Robert L. Hirsch/Roger Bezdek/Robert Wendlding: Peaking of World Oil Products: Impacts,
Mitigation, and Risk Management, Washington 2005.

tem full of defects but ultimately predictable, and to develop an interest in its viability and
future development while at the same time being able, if necessary, to use political muscle
to enforce their energy interests. Yet with the new, growing fear of supply bottlenecks and
shortages, there is a danger of powerful states lapsing into neomercantilist concepts of
foreign trade. This makes competition for energy a zero-sum game in which it is vital to be
on the winning side. Not only in the USA is there a growing temptation to split up international
markets in response to growing import dependence, making exclusive relations with
dependent suppliers the basis of supply security and, if necessary, squeezing out competitors,
as demonstrated by China and its resource relations with Africa. Geopolitics and the
free market thus increasingly turn into opposing forces.
Oil, gas, and coal are still in the main being traded freely, however, although this is
not secured in international agreements. The fact that a signifi cant part of this trade is
carried out in the form of long-term supply contracts does not mean that there are restraints
on trade or competition, given that these contracts usually include re-negotiation
clauses and cater for price adjustments in the event of fl uctuations on the raw materials
or end-product markets. Trade with fossil energy carriers is expanding. In the past 20
years it has grown at twice the pace of energy production – in the 1990s even at three
times that rate 39 – and will make a further massive leap forward in coming decades, both
in absolute terms and in terms of share of production. The share of supra-regional net
trade in global supply will increase from 45% for oil today to 58% by 2030, from 16% to
28% for gas, and from 9% to 14% for coal. 40 Energy trade listed on stock exchanges will
probably expand faster than the portion realized via long-term contracts. This means that
mutual dependencies within the international energy system will continue to grow.
Unlike trade, investment and technology fl ows in the energy sector are subject to
considerable restrictions. The fl ow is curbed by the governments of exporting countries
which either reduce the scope of action of foreign companies or exclude them from certain
projects or the entire market. In the 1960s, seven listed multinationals (the Majors or
IOCs /International Oil Companies) controlled 85% of the world’s oil and gas reserves.
Many oil producing countries tried to regain control of their raw material resources by
means of nationalization in the 1960s and 1970s. But many governments lost interest in
their energy companies in the low-price phase of the 1980s and 1990s, and energy sectors
were reopened to foreign investors, although this did not happen anywhere to a great
extent. The trend to open up seemed to gain in impetus world wide after the demise of
the Soviet Union. Yet the wind has changed again. Resource nationalism is experiencing
a renaissance in a number of natural resource exporting countries, and more and more
governments are acting in an appreciably more restrictive manner. IOC cooperation in
joint ventures, for instance, is cancelled, concessions are withdrawn, and sometimes
there are even expropriations.
The private energy companies account for around one half of world oil production,
but they now have access to only 23% of world reserves and only 6% of this access is
unlimited. The greater part of proven reserves is in the hands of state-owned companies
(National Oil Companies, NOCs) and is ultimately controlled by governments. Thus the
energy supply of importing countries and future developments on international energy
39 European Commission, Directorate-General for Energy: Energy in Europe. Economic Foundations
for Energy Policy (The Shared Analysis Project), Special Issue, Luxemburg, December
1999, p. 38.
40 International Energy Outlook 2002, loc. cit, p. 70f.
479

markets depend to a great extent on a small group of NOCs and the governments behind
them. And the power of the NOCs is growing. Several of them, driven by high energy
prices, are in the process of challenging the Majors. ExxonMobil is still the world’s largest
company and in 2005 made exorbitant profi ts totaling 36 billion US dollars. But more
and more NOCs are successfully placing themselves at the top of the relevant company
ran-kings. Gazprom, Petrochina, Petrobras, Sinopec, Rosneft, and Lukoil are already
amongst the 15 largest energy companies in the world. 41 Taking oil and gas output alone,
there are seven state-owned companies among the ten largest producers and the best
placed private company, ExxonMobil, is number fi ve. Five small NOCs (Saudi Aramco,
Kuwait’s Petroleum, the Iranian NIOC, the Algerian Sonatrach, and the Abu Dhabi National
Oil Company) together account for one quarter of world production. 42
It should be noted that both the degree of control by governments and the politicization
of NOCs varies considerably from one country to another. Companies such as
Statoil (Norway), Petronas (Malaysia), or Saudi Aramco (Saudi Arabia), for instance, are
regarded as effi cient, competitive companies in terms of an entrepreneurial logic. In the
case of others – such as the Nigerian NNPC or the Venezuelan PDVSA – ideological orientations
and political stipulations largely determine company decisions. The main task
of state-owned energy companies is to supply the rentier state with funds for its budget,
which includes in particular the alimentation of corrupt clientele systems and the assumption
of state responsibilities in the areas of infrastructure and social policy. In 2005,
for instance, the Venezuelan PDVSA had to spend around 7 billion US dollars to fi nance
state programmes in the sectors of education, health, food supply, and job creation. 43
Many NOCs play a special role in their governments’ pursuit of geopolitical aims. Venezuela,
for instance, has been able to buy considerable infl uence in the region by subsidizing
a number of Latin American states with cheap oil and has been able so far to prevent the
formation of an alliance against the “Bolivarian” left-wing populism of President Chávez.
The Russian gas and oil giants Gazprom and Rosneft are regarded as “willing henchmen”
of the Kremlin 44 in expanding Russian infl uence in Europe and Asia and in the positioning
of Russia as a superpower. The internationally operating Chinese energy companies have
one explicit foreign policy raison d’etre: to secure Chinese energy security.
The NOCs do not compare favorably with the independent oil companies in many
ways. They invest less in exploration, develop a smaller proportion of their reserves, their
technology is not so modern, their management is at times less coherent, and they handle
information more restrictively. One of the chief fi ndings of the most comprehensive
research project to date on the role of the NOCs in international energy markets (pro-
41 PFC Energy 50. A ranking of the World’s Largest Listed Firms in the Oil and Gas Industry,
January 2007; accessible at: www.pfcenergy. com; cf. also PIWs Top 50: How the Firms Stack Up
(accessible at: www.energyintel.com).
42 Valerie Marcel/John V. Mitchell: Oil Titans. National Oil Companies in the Middle East,
London/Washington 2005; Valerie Marcel: Investment in the Middle East Oil: Who Needs Whom?
Chatham House Report, February 2006.
43 David R. Mares/Nelson Altamirano: Venezuela’s PDVSA and World Energy Markets: Corporate
Strategies and Political Factors Determining its Behaviour and Infl uence (Case Study from the
research project “The Changing Role of National Oil Companies in International Energy Markets,”
Rice University, James A. Baker III Institute for Public Policy, and the Japan Petroleum Energy
Center), Houston 2007, Ms., S. 46 (accessible at: www.rice.edu/energy/publications/nocs.html).
44 “Putins willige Handlanger. Der russische Gasriese Gasprom wird aus dem Kreml gesteuert.
Seine Geschäfte bleiben undurchsichtig”, in: Die Zeit, 27.4.2006.
480

duced by Rice University in Houston, Texas, together with the Japan Petroleum Energy
Centre, and including 15 case studies and the development of theoretical models) was
that the average technical effi ciency of NOCs reached just 60–65% of the effi ciency of the
large independent energy companies. 45 Since all NOCs are swimming in money because
of the high energy prices, there is little incentive to increase effi ciency.
The decisive question for importing states is whether, in the new geographic energy-supply
scheme, NOCs will play their part in ensuring that enough is invested in
production capacities to meet foreseeable demand. In its two most recent reports the
Paris Energy Agency expressed the fi rst doubts concerning whether investment would
be suffi cient in the medium term to cover anticipated demand. 46 An investment gap of
several billion dollars is yawning. In several major producer countries there are signs
that investments will not even suffi ce to meet medium-term supply commitments, let
alone contribute to meeting growing global demand. Russian gas and oil production is
said to be dangerously underinvested, as is the Iranian oil sector. The Venezuelan stateowned
company PDVSA has drastically scaled down its replacement investments and
has not reached its OPEC quota for years. With mismanagement and corruption, the
Indonesian state-owned company Pertamina has managed to reverse the status of OPEC
member Indonesia to that of a net exporter, despite adequate reserves. These are only a
few examples. Following their experience with overcapacity and low prices in the 1980s
and 1990s, many NOCs are understandably reluctant to invest: they fear over-investment
much more than loss of business. As long as additional revenues are possible without expanding
capacities or intensifying production – as happened as a result of price increases
in recent years – incentives to raise investment quotas are low.
Where many NOCs see little reason to invest in the expansion of production, the
stock-exchange listed energy companies in the West are having obvious diffi culty in placing
investments and developing larger projects. Most exporting countries are no longer
dependent on their know-how and capital to capitalize on their energy resources. Some
NOCs are now highly effi cient and fully equipped with capital. And those who need
support can buy equipment, staff, and know-how easily from service enterprises such as
Halliburton or Schlumberger without having to commit themselves unduly.
Incidents such as the following show how strongly the wind is blowing in the faces of
IOCs at the moment. In August 2006, Dubai nationalized its oil industry. Algeria secured
for its national company Sonatrach majority holdings in all joint ventures with foreign
companies. Bolivia nationalized the entire energy sector, had the oil and gas fi elds occupied
by the army, and threatened all foreign companies not willing to accept one-sided
new terms with expulsion. Since last year the Russian government has been trying to
force a consortium consisting of Shell, Mitsui, and Mitsubishi – that has already invested
20 billion US dollars in the development of the world’s largest oil and gas project, Sakha-
45 Amy Myers Jaffe: The Changing Role of National Oil Companies in International Energy
Markets. Introduction and Summary Conclusions, Rice University, Houston 2007, Ms., p. 15; see
also: Stacy L. Eller / Peter Hartley / Kenneth B. Medlock: Empirical Evidence on the Operational
Effi ciency of National Oil Companies, Study from the research project “The Changing Role of
National Oil Companies in International Energy Markets”, Rice University (James A. Baker III Institute
for Public Policy) and the Japan Petroleum Energy Center, Houston 2007, Ms., accessible at::
www.rice.edu/energy/publications/nocs.html).
46 International Energy Agency: World Energy Outlook 2005, Paris 2005, p. 95; World Energy
Outlook 2006, Paris 2006, p. 72.
481

lin 2 – into a minority position. In Ecuador in mid-2006 the government confi scated installations
of the North American oil company Occidental (Oxy), in which the company
had invested nearly one billion US dollars. Also in 2006 Venezuela turned the oil fi elds of
foreign companies into joint ventures with a 60% interest on the part of the state-owned
PDVSA; when ENI and Total protested, they were expropriated. This year the government
forced the operators of the highly successful Orinoco heavy oil project, secured
with long-term contracts, to convert their majority holdings into minority stakes. Among
those affected are Chevron, Phillips, Total, Statoil, Exxon, MP, and CONOCO. This list
could be extended.
One result of the restrictive attitude of many energy exporting states towards IOCs is
that the latter are forced to switch to areas in which they have comparative advantages.
This is the case where oil and gas are hard to fi nd or where production is technically
diffi cult. Conventional oil that is cheap and easy to produce is playing an increasingly
minor role in investment planning. According to a Goldman Sachs study, the Majors will
invest 660 billion US dollars in new projects in the coming six years, but only 13% in
developing conventional oil fi elds. 47 Involvement in the use of renewable energies is part
of these new projects. It would be an historical irony if the resource-rich countries of the
Third World, systematically exploited by the IOCs in the century of oil, should succeed
in reserving low-cost, easy-toproduce oil for themselves, thus forcing the IOCs to take on
a pioneering role in the valorization of “expensive” oil that is not easily accessible, and
also to become “greener.”
But before the interfaces between IOCs and NOCs consolidate, they could easily become
fl uid again. This could happen if expert forecasts that in the coming years supply
will grow more swiftly than demand turn out to be true. The tight market could become a
thing of the past by 2010 at the latest. Then there might be greater capacity reserves once
more and prices could fall. Saudi Arabia is in the process of investing 50 billion US dollars
in the consolidation and development of its production capacities in order to build
up reserve capacities, enabling it to play its role of “Central Bank for the international
oil trade” (West) again. The consulting fi rm CERA (Cambridge Energy Research Associations)
has examined those oil projects worldwide that will enter the market shortly
and come to the conclusion that in the next fi ve years production capacity will grow by
20%, meaning that 15 million additional bpd will become available; consumption over the
same period is to grow at a much slower rate. 48
Should the “tight” market phase really come to an end, this would constitute both
a danger and an opportunity. The danger is that commitment to developing unconventional
reserves, non-fossil energy sources, and new technologies would slacken off. This
would be fatal, given the approach of the production plateau and the requirements of environmental
protection. The opportunity, on the other hand, would be that, if prices fall,
cooperation with the IOCs becomes more attractive for the NOCs. Before this happens,
however, the IOCs would fi rst have to undergo a sea change. The advice given by industry
experts is to no longer insist on majority holdings, be prepared to make lower profi ts,
and make offers that are more attractive to the host country by including advanced technology
components and extra services, such as development of electricity production,
creation of refi nery capacities, and the like. The times when the Majors could behave like
lords of all they surveyed and cream off the best of all the projects are defi nitely past, to
482
47 Cf. Financial Times Deutschland, 7.11.2006.
48 The Economist, 20.4.2006.

quote one Total manager. Should the big international companies not read the writing on
the wall, lack of investment opportunities could leave them as subordinated technology
suppliers to the NOCs. 49
What is quite clear is that even today, the IOCs no longer dictate the rules and are no
longer the rule makers, but have to accept the rules made by others and have thus become
rule takers.
I.4 Resource Confl icts and Market Organization
Relations between the oil and gas producing countries of the Third World and the
consumer states are marked by a deep-seated confl ict over the distribution of revenues
arising from the production of natural resources. 50 This confl ict goes back a long way and
has gone through many phases. Towards the end of the nineteenth century, the superpowers
of the day gained control of the Middle East, their natural resource companies
obtained oil concessions, and the governments of the imperialist powers gave energetic
support to the rise of “their” companies as global players. Right up until the 1970s the
(dependent) territories and states that granted the concessions received only a small
portion of the revenue in the form of concession levies (royalties) and taxes. The seven
international oil companies (IOCs) that dominated that market agreed on standard prices
(“posted oil prices”) in confi dential oligopoly deals that led to a systematic undervaluing
of Gulf oil against US oil. 51
After OPEC was founded in 1960, the producing countries tried for decades to negotiate
better conditions with foreign companies. It was not until this failed that the radical
wing gained the upper hand and decided on the autonomous fi xing of prices, taxes, and
royalties, the introduction of nationalization measures, and control of a large part of
the value chain. This agenda was successfully implemented. List prices were increased
sharply after a long period of stagnation, and royalties were increased from 12.5% (1960)
to 20% (1975) and tax rates from 50% to 85%. Nationalization was swiftly accomplished
and by 1974 national shares in oil production among OPEC members were up to 60% and
Algeria, Indonesia, Iraq, Iran, and Qatar had nationalized all of their refi neries. 52
The corrections to the distribution formula for rents that were undertaken following
the OPEC embargo of 1973 and the disruptions in production after the revolution in
Iran and the Iran–Iraq war of 1979/80 did not last for long, however. Intensifi ed energy
relations with non-OPEC countries, the promotion of oil production in the North Sea,
49 Economist Survey: Global or National? The Perils Facing Big Oil, in: The Economist,
28.4.2005.
50 This theory has been convincingly developed theoretically and empirically in a number of
essays and books by Bernhard Mommer, who was Senior Research Fellow at the Oxford Institute
for Energy Studies for a number of years from 1995 and now works for the Venezuelan government.
A selection: Bernhard Mommer: The Governance of International Oil. The Changing Rules of the
Game, Oxford Institute for Energy Studies, WPM 26, Oxford 2000; idem: Fiscal Regimes and Oil
Revenues in the UK, Alaska and Venezuela, Oxford Institute for Energy Studies, WPM 27, Oxford
2001; idem: Grafting Liberal Governance on the Oil-Exporting Countries: Will the Transplant Take
Root?, Paper presented to the 42nd Annual Convention of the International Studies Association,
Chicago 2001, all accessible at: www.oxfordenergy.org.
51 Daniel Yergin: Der Preis. Die Jagd nach Öl, Geld und Macht, Frankfurt 1993 (Fischer TB).
52 Reinhardt Bolz/Manfred O. Hinz/Norman Paech/Karl Wohlmuth: Kooperation oder Konfrontation?
Materialien zur Rohstoffpolitik, Bonn 1975, p. xiv ff.
483

Alaska, and the Gulf of Mexico, increased use of nuclear energy, the development of strategic
reserves, and state support for substituting imports with improved energy effi ciency
and promotion of regenerative energies transformed the market for fossil energy carriers
by 1985 at the latest back to a buyer’s market. From then on, oil and gas were viewed for
decades as cheap energy carriers, in abundant supply, and were of little security policy
relevance. In this phase producing countries tried to reach greater security of demand via
agreements with importing countries, without any notable success.
After the end of the Cold War, the OECD states made intensive efforts to further develop
the governance structure of the international energy system and achieved much in
a very short time. The assumption was that a durable balance could be achieved between
demand and supply once it was possible to secure the opening of the energy sectors of
the Third World and transition countries to foreign direct investment in a regulatory
framework and establish liberal investment conditions. This package, which was a component
of the broad globalization project of the 1990s pursued by the USA with the support
of Europe, also included the privatization of oil and gas sectors and the strengthening
of the role of the IOCs.
Building on the broad network of existing bilateral investment agreements between
production and consumer states, the new catalogue of rules for the energy sector was
to be formalized in the Energy Charter (Energy Charter Treaty, concluded 1991, signed
1994, partially in effect since 1998) and in a multilateral investment agreement (Multilateral
Agreement on Investment, MAI) on which negotiations took place between 1995
and 1998, before it was put on ice. The rules that were agreed upon as part of WTO
negotiations were seen as additional backing. One central requirement of the OECD nations
in these negotiations was that producing states should in future relinquish those
legal instruments which had hitherto been used to gain revenue shares. This included
making their taxation systems investor friendly, doing without royalties, and preferably
denationalizing their energy sectors instantaneously. 53 Since then, implementation of
the Energy Charter has become as bogged down as the WTO negotiations. The 1990s
vision of a governance structure for the international energy system will not become a
reality for the time being. The major exporting states reject any further liberalization of
energy markets and the application to the energy sector of the World Trade Organisation
regulatory system and its arbitration procedures. At the present time there is, apart from
diverse informal energy dialogues, no forum of discussion for a universally applicable set
of regulations for the energy sector.
It is also problematic that no one at present has even a rough draft of a concept for
negotiating a regulatory system that would go beyond the negotiation attempts currently
blocked.
Since 2001 it has become increasingly clear that any future regulatory mechanisms
and catalogues of rules for the international economy will not match the US concept
of globalisation. Russia, China, India, Brazil, and many other states are integrated in
the international economy and apply their own rules on market access, investment, and
competition, are obdurate about having a strong state, and ignore calls for democratization
without incurring sanctions and other disadvantages as a result. The central political
issue is therefore: What sort of governance structure would be acceptable to producing
and importing countries alike and would do justice to both camps? Is there any point at
484
53 Cf. Mommer: The Governance of International Oil, loc.cit., p. 38f.

all in seeking agreement, when dealing with rentier states with superpower ambitions
which anticipate only disadvantages from liberalization of their energy sectors and energy
relations? In the light of rapidly spreading resource nationalism, is there any chance
of reaching a consensus on a concept that envisages strengthening market mechanisms?
Also, is a convergence of views between producers and competing major consumers at all
conceivable if the powerful OECD countries keep up their mantra-like demands for acceptance
of liberal competition and market rules (such as the Energy Charter) before embarking
on any further steps towards reaching an understanding? Why should Russian
reservations not be discussed in negotiations when not even Norway sees its interests as
protected by the Charter and US accession is highly unlikely?
There will be a chance of reaching an understanding only if reference is made to common
interests, and there are such interests. Just as consumer countries have an interest
in the multilateral safeguarding of their supplies on the grounds of their reliance on
imports, so should producing countries be interested in consensus and continuity if they
are to have the reliable and continuous fl ow of resources required to maintain political
stability in their countries. It should be possible to dovetail security of supply on the one
hand, and stable demand with relatively constant fl ows of resources on the other, under
one international regime. A common regulatory framework of this kind could have the
function of formalizing and stabilizing relations between the actors and, if possible, of
reducing the limitations of the market mechanism. It is obvious that overcoming the rent
mechanism will not be part of the agenda in any negotiations on designing an international
energy regime.
The OECD nations will have to offer more to exporting states than just a more favorable
splitting of revenue, since this has been the case anyway for some time now.
What could be attractive are offers of help in overcoming the “resource curse” 54 in the
form of reduction of reliance on resource exports and income from rents, and support
in developing economic sectors outside the energy resource area, and also agreements
54 The OPEC nations have increased their income from exports from 100 billion US dollars to
340 billion US dollars since 1998, but the additional purchasing power has increased the tendency
of many of these states to live above their means. In a broad-based comparative study in 1995 by
Jeffrey Sachs and Andrew Warner, this phenomenon is referred to as the resource curse. Some features
of this are the alimentation of intricate clientele networks and corruption, the inability to reduce
social exclusion and poverty, and the failure of attempts to create conditions for solid growth
outside the resource sector (cf. Jeffrey D. Sachs/Andrew M. Warner: National Resource Abundance
and Economic Growth, NBER Working Paper No. W5398, December 1995, accessible at: http://
ssrn.com/abstract=225459). The latter is also due to high earnings from resources distorting structures
and in particular reinforcing the tendency of the resource sector to spread at the cost of other
branches, virtually choking the economy. High earnings from exports also raise the exchange rate
and thus additionally weaken the international competitiveness of export sectors other than the
resource sector (economists use the expression “Dutch disease” in discussing this symptom). Since
rent income in resource exporting states is largely not used productively and mainly channeled
into government expenditure, these states are just as dependent on oil supplies as the importing
countries. An additional factor is that services and liabilities grow at a pace with increasing earnings
and if prices drop, can be reduced only with diffi culty. This was behind the severe crisis in
the 1980s when the oil income of the Gulf States dropped dramatically. A reduction of government
expenditure proved a risky undertaking domestically, since broad sectors of the population were
accustomed to state benefi cence, and a complete stoppage of benefi ts to neighboring states with
low oil supplies as part of the petrolist system entailed foreign policy risks.
485

on stabilizing export earnings. One precondition of convergence, however, is that the
two sides proceed on the basis that producers and importers have a mutual interest in
stability and in the lowest possible level of confl ict in the international energy system.
There are, however, versions of the new energy nationalism that apply to exporting and
importing nations alike where greater dividends are expected from confrontation than
from cooperation.
The rules of the international energy system are, however, not something that the
OECD nations can decide on together with the energy exporting countries. The system
must also work for the “rest of the world,” especially for developing countries dependent
on energy imports, otherwise rising energy costs would risk an escalation of the
North– South confl ict. The economies of developing countries are usually marked by oil
intensity and tend to react strongly to fl uctuations in the oil price. Where OECD nations
can in part compensate for the redistribution of wealth brought about by rising oil prices,
as part of the oil profi ts fl ows back via demand for capital equipment and manufactured
goods as well as in the profi ts of international energy companies and investments by the
energy exporters, in most developing countries there is nothing to cushion the effects
of rising energy prices. Oil prices mean more in countries with a low per capita income
because the oil bill has greater signifi cance.
Whether a country can still afford the oil imports it needs to maintain its production
and transport depends on whether the foreign currency required can be acquired either
by increased export earnings or by loans. Even before the rise in oil prices, many developing
countries had to use one third or more of their export earnings for energy imports.
Since then high prices have acted as a brake on growth or have exacerbated debt problems.
Thus the debt relief that is part of the IMF and World Bank initiative to reduce the
debts of the HIPC states (Highly Indebted Poor Countries) is not able to compensate for
the rising costs of oil imports for 14 out of 19 oil importing African states. 55
486
II. GERMAN AND EUROPEAN POLITICAL APPROACHES
II.1 Background: Trust in the Market and Unsystematic Interventions
In the post-war period, up to the late 1960s, the prime objective of German energy
policy was to obtain cheap energy for export industry. This was achieved fi rst by subsidizing
coal mining. Soon, however, German coal proved to be too expensive by international
comparison. In the course of the 1950s the advocates of a consistent liberalization and
deregulation of the economy asserted themselves against the proponents of autarchy and
protectionism, and in 1956, with the explicit intention of putting coal under pressure
from competition, tariffs on heating oil imports were abolished. Oil became the dominant
energy carrier. 56
In the 1970s, the question of security of supply came to the forefront for a while.
The German government had set the stage for diversifi cation of sources and reduction
of import dependence in two important ways even before the onset of the oil crisis. It
55 African Development Bank: High Oil Prices and the African Economy, Concept Paper for
the ADB Annual Meetings, Ouagadougou, Burkina Faso, 2006.
56 Rainer Karlsch/Raymond G. Stokes: Faktor Öl. Mineralölwirtschaft in Deutschland 1859–
1974, Munich 2003, pp. 303 ff, 323 f.

had started to subsidize the construction of nuclear plants and the linking of the West
German market to Soviet gas production was placed in a foreign policy context. In a
spectacular three-cornered deal, Mannesmann, fi nanced by Deutsche Bank, supplied the
pipes for the fi rst pipeline connection with the Soviet Union. In return, Ruhrgas AG was
supplied with Soviet gas from 1973 on. Wintershall and VNHG also concluded long-term
gas supply contracts with Soviet companies. The USA, however, regarded energy relations
with the dominant communist power with marked displeasure.
In the 1980s, the worldwide advance of neoliberal approaches in economic policy also
led to a (further) surge of liberalization in Germany. 57 In the energy sector, however, efforts
at deregulation and attempts to strengthen competition did not penetrate below the surface;
the monopoly structures were not overcome. Up to the mid 1990s, the energy sector
was excluded from the cartel and price control ban and exempted from abuse controls,
which led to the Federal Republic being divided into supply zones with one monopoly
each. The paragraphs in the Competition Act (GWB §103 and 103a) that made this exemption
possible were not revoked until 1996. But the monopoly structure in the transmission
and distribution networks for grid-bound energy has still not come to an end.
Although there was great reluctance on the domestic front to entrust energy supply
to the market, confi dence in the market’s ability to organize international resource fl ows
was absolute. The assumption was that the international energy markets worked well
enough to satisfy German import requirements. The pursuit of globalisation and the
accompanying commitment to liberal investment and trade conditions in WTO negotiations
and in other international forums replaced any specifi c energy security policy.
The organization of the production chain from the source to the end product, including
in politically unstable regions, was seen as a job for the private sector, requiring at the
most occasional well-meaning support from governments but not systematic political
intervention.
In addition to the economic and competition angles, environmental protection has
been of central importance in energy security since the 1970s. The demands and initiatives
of civil movements and NGOs led at the political level to new institutional arrangements
and to the formulation and implementation of environmental goals; in 1976 environmental
protection was formally declared a political and administrative cross-sectional
responsibility for the executive sector. 58 In energy policy, environmental compatibility
acquired the status of an independent objective. This was institutionalized in 1986 in the
form of the Federal Environment Ministry whose responsibilities now include renewable
energies, atomic safety, and environmental protection (BMU). The BMU has less infl uence
on energy policy than the government department with the main responsibility,
the Federal Ministry of Economics and Technology, whose main energy policy task is to
secure energy supplies at acceptable prices but which also looks after energy research
and the nuclear energy sector.
Overall liberalization and environmental protection dominated the energy policy
agenda in a unique tandem for over two decades. Security of supply played a subordinate
role. Whereas two dimensions of the energy policy objectives triangle – environmental
compatibility and economic effi ciency – were institutionalized into government depart-
57 As early as the 1960s the German economic structure was seen as the “most liberal … economic
structure in the entire industrialised world,” Karlsch/Stokes, loc.cit., p. 323.
58 Martin Jänicke/Helge Jörgens/Kirsten Jërgensen/Ralf Nordbeck: Germany, in: OECD, Governance
for Sustainable Development. Five OECD Case Studies, Paris 2002, pp. 115ff.
487

ments, there was no necessity for an analogous institutionalization of energy security. It
was not until the end of the 1990s – and even more so since 9/11 – that in Germany, as in
many other energy importing countries, the conviction has gained recognition that market
orientation and environmental standards alone are not enough to guarantee security
of supply. There was a call for governments to play a more active role.
II.2 Outline of Current Energy Foreign Policy – German Themes and European Processes
The EU Commission and some EU states, such as the Netherlands and the UK, are
well advanced with analysis and debate on the foreign, security, and geopolitical dimensions
of energy security and have brought these to a preliminary conclusion with the
publication of the results in strategy documents. In Germany, this process is still continuing
but the results of the discussion and consultation processes between the actors are
due to be presented this year.
Tenets, positions, and themes are nevertheless emerging from the process of shaping
German foreign policy that could indicate the outlines of an energy security concept. At
the centre of energy foreign policy is the securing and diversifi cation of sources, especially
for oil and gas. This includes the fostering and advancement of existing strategic
partnerships, for instance with Russia and Algeria, and talks with the Caspian states and
Iran, among other things to explore the possibilities for such partnerships or to pave the
way for them. Simultaneous dialogues at the bilateral and multilateral level with supply
and transit countries and with other major consuming countries, including the newly
industrialised states, also form part of this procurement diplomacy.
A further energy foreign policy theme is the creation of a valid international regulatory
framework for relations between consuming, producing, and transit countries. Efforts
to this end are concentrated on the implementation of the Energy Charter Treaty
(an agreement between 53 European and Asian states plus Australia) and its trade annex,
with which application of WTO rules in the energy trade are to be enforced. The Charter
process has, however, been stymied for some time now because key protagonists such as
Russia, Norway, Japan, Australia, and Turkey have not ratifi ed either the Treaty and/or
the trade annex and will presumably not do so in the foreseeable future.
A further major topic in German energy foreign policy is the fostering of energy effi
ciency and renewable energies in the international context by means of technology and
knowhow transfers, and cooperation in an international programme of action and in
a network in existence since 2005 that is endeavoring to make progress on the further
development of renewable energies at the political level. German foreign policy’s explicit
support for the application of international environmental and climate change agreements
is also linked to energy security. There are similar links in many themes related
to classic security policy and crisis control. 59 German involvement in defusing crises and
overcoming confl icts in the Middle East, Iran, and Central Asia is increasingly being justifi
ed in terms of energy security considerations.
The prime political instrument for the achievement of energy security is the formation
and shaping of strategic partnerships or special relationships with key production
and transit countries. A network of partnerships is intended to foster mutual dependencies,
making the international energy system as interdependent as possible and thus
59 “Energiesicherheitspolitik ist auch Friedenspolitik,” Walter Steinmeier, 16.2.2007, www.
auswaertiges-amt.de/diplo/de/Infoservice/Presse/Reden/2007/070216-Energiekonferenz.html .
488

ensuring a common interest in trouble-free energy relations. Foreign Minister Steinmeier
has put forward a proposal for developing relations with Eastern and Southern nations in
particular that involves entering into a dialogue based on clearly defi ned rules designed
to gradually build up confi dence and reduce tensions. A methodological archetype for
this attempt to create a culture of dialogue and stability could be the CSCE talks in Helsinki.
One precondition for the functioning of this planned system of cooperative security
is the presence in the partner countries of strong, globally competent private energy
companies (national champions) capable of representing national interests effectively
in the international competition for energy. 60 Relations with Russia – a country working
towards unilateral European dependence on Russia and not for interdependence – will
be the touchstone of the interdependence concept.
At the European level, the debate on and formulation of policies and objectives for
the energy sector is farther advanced than in Germany. There are fi nished concepts and
catalogues of goals for a common energy policy and a common energy foreign policy,
including the Commission “Green Paper,” 61 the “Solana Paper,” and the “Energy Package”
of early 2007. Here too the idea underlying all conceptual and strategic statements is
that the greater the mutual dependence between the parties, the better the international
energy system functions. The European vision of a system of myriad interconnections
and dependencies is in contrast to the US concept, which has its vanishing point in the
greatest possible reduction of energy dependence. 62
No matter how far advanced the EU’s energy policy concepts may be, none of them
have so far been implemented. There has been no signifi cant progress either in the
liberalization of European energy markets as foreseen in the single market packages of
1992 and 2003 or in the alignment of positions vis-à-vis third parties so that the community
can speak “with one voice.” There are still 27 energy policies and 27 energy
foreign policies, often contradictory, and all key energy policy competences are still
the responsibility of the individual member states. In the EU context, all concerned
continually emphasize the outstanding importance of a common energy policy and a
coherent foreign policy in relation to energy, but as soon as practical implementation
is called for the Commission’s initiatives are thwarted and member states resist any
attempt to curb their national competencies. An open debate on takeover blockades in
the case of Suez – Enel or Eon – Endesa, for instance, has to date been unsuccessful, as
has any serious tackling of the problem of growing dependence on Russia, never mind
fi nding a common position on the Union’s most important energy supplier. The latter
is not in the offi ng either because relations between Russia and EU countries are determined
by bilateral agreements. Tensions between resource nationalism on the part of
member states and the European energy strategy are also manifest in the question as to
whether national sovereignty can or should be curtailed when energy mixes are deter-
60 At the BDI Raw Materials Congress the German Chancellor advised companies to invest
more in foreign holdings. She offered to back up these investments with federal guarantees and
untied loans. Financial Times Deutschland 21.3.2007.
61 Commission of the European Communities, Green Book, see Note 5.
62 The reduction of dependence is already called for in the 2001 National Energy Plan. Since
then this demand has been repeated with growing urgency. The infl uential conservative columnist
Tomas Friedman, for instance, wants to reduce the USA’s import reliance as much as possible with
uncompromising promotion of “green” energies and has no qualms about attacking the automotive
industry. The Pentagon recently even co-fi nanced a study by the energy saving Guru Amory Lovin.
489

mined. European energy policy will not be able to manage in the longer term without
specifi cation, such as setting a minimum percentage of regenerative energies and limits
for fossil fuels, but the objections of many member states to this type of intervention
appear insurmountable at the moment.
Yet the Commission does have the option of taking initiatives, as it did in the sphere
of energy effi ciency. It has at its disposal instruments from the single market policy area,
responsibilities for trade issues, authority in environmental policy, and also fi nancial
tools that can be put to use in the energy policy sector. Implementation and institutionalization
of many energy dialogues (EU-OPEC, Gulf Cooperation Council, southern Mediterranean
states, Southeast Europe, the Baltic region, Norway, Gulf of Guinea states) are
an important step in the direction of a cooperative security system. But whether or not
the vision of initiating and integrating its neighbors into the single EU energy market and
creating an area with common rules going beyond the scope of the Union succeeds will
depend largely on whether it will be possible to make progress with the single energy
market itself, something that is far from completion.
No matter how important the Commission’s initiatives may be, the Union will not get
any nearer to a common energy policy without a commitment and readiness to reach a
consensus on the part of governments. The member states alone can overcome the coordination
and implementation defi cit and Germany could play an important role here. To
quote the opinion of an IEA evaluation just issued: “Only a handful of countries can have
as dramatic an impact on global energy policy as Germany.” 63
III. SCENARIOS BETWEEN COMPETING BLOCS AND MULTILATERAL MARKET
REGULATION
The soundest and most frequently cited energy scenarios are those of the International
Energy Agency (IEA) of the OECD, which are updated annually on the basis of
newly obtained data on production and consumption. In a trend scenario up to 2030,
the Agency assumes that developments will continue as hitherto without any interruptions
or erratic movements and that the industrial and newly industrialised countries
will make no major changes to the energy policy concepts. The IEA alternative scenario
refl ects the possible effects of environmental protection policies. 64 In this scenario, dependence
on imports of oil and gas diminishes as a result of the implementation of environmental
protection measures, but in both scenarios it is nevertheless assumed that
the energy systems of most OECD states will continue to rely on oil and gas imports to a
high degree after 2030 and thus will remain geopolitically vulnerable.(c.f. I.1). The implications
of major geopolitical and geoeconomic changes and disruptions for the scenarios
is dealt with only marginally.
63 International Energy Agency: Energy Policies of IEA Countries – Germany – 2007 Review,
Paris 2007, p. 7.
64 Based on this, NGOs have developed alternative scenarios (cf. EREC /Greenpeace: Energy ( R)Evolution. A Sustainable World
Energy Outlook, Amsterdam, January 2007), but in these scenarios too the international energy
system does not function without fossil energy carriers. Their use is much lower than in the IEA
scenario, though.
490

In the case of the scenarios presented here, the main focus is on geopolitical and geoeconomic
perspectives and risks for the period up to 2020. 65 In 2020, one half of oil and
gas production will come from countries that are currently rated as high risk zones. 66 The
geopolitical risks stem from confl icts between states over the control of energy sources
and confl icts within states about the acquisition of natural resource rents plus the increasing
tendency of exporting states to use energy as a bartering tool. Internal confl icts
in producing countries, wars, terrorism, and failing states can jeopardize the energy supply
of importing states by short-or longer term shortages in supply, as can unexpected,
arbitrary changes in the export policies of some states. On the other hand, the strategic
energy procurement policies of powerful importing states can have destabilizing effects
geopolitically, especially if these strategies include the possibility of surrogate confl icts
and the direct militarization of energy relations.
In both scenarios it is assumed that oil and gas consumption in the newly industrialised
and developing countries will increase signifi cantly and that production locations
will shift. Oil and gas production in OECD states will drop markedly and will be concentrated
on the regions with large, unused reserves, such as Russia, the Caspian region, the
Gulf states, and West Africa. An open question, however, is whether in countries with
high levels of reserves equally high shares of production can be expected. If a country
such as Indonesia can become a net importer of oil in spite of high reserves (some experts
expect a similar development in Iran that has over 15% of world gas reserves and 11% of
oil reserves), incongruities could result that would also impact on the overall geopolitical
picture. But in the scenarios presented here, as in most other forecasts, it is assumed that
the size of reserves is an indicator of the scale of production, even if there could be some
regional and transitional imbalances. What is also not considered in the scenarios is the
possibility that – triggered by consistently applied environmental policies or radical efforts
to reduce import dependence – a revolutionary technology might be developed that
would make it economically acceptable to replace fossil energy carriers on a large scale.
But experts say that, from today’s perspective, this is only a hypothetical possibility.
The central factor in both scenarios is the role played by multilateralism and institutionalized
cooperation in global policies. In the fi rst scenario, the world splits into two
regional blocs competing for resources and markets. Confrontation dominates interaction
in the international system and multilateral mechanisms play only a marginal role.
Alliances and confl icts between the blocs are the factors that determine international
political developments. In the second scenario, it is assumed that the multilateral system
will continue to govern international relations in future. Globalisation will continue,
not necessarily according to the US neoliberal blueprint, but conducted with heed to
the interests of newly industrialised and developing countries. This includes leaving resource
allocation as far as possible to the markets, while compensating market failures
and asymmetries with negotiated market regulation – something that will be particularly
diffi cult in view of the strong politicization and well entrenched oligopoly and cartel
structures in the energy markets.
65 The basic pattern for both scenarios is based on: Clingendael International Energy Programme
(CIEP): Study on Energy Supply Security and Geopolitics. Final Report, The Hague, 2004,
cf. Note 6; and Femke Hoogeveen/Silbur Perlot (Ed.): Tomorrow’s Mores. The International System,
Geopolitical Changes and Energy, Clingendael International Energy Programme, The Hague,
December 2005.
66 CIEP: Study on Energy Supply Security, loc.cit, p. 85f.
491

492
III.1 Bloc Rivalries and Bloc Confl icts
In this scenario the process of the internationalization of markets has passed its zenith,
and the world regions are drifting apart and walling themselves off from one another.
Strategic commodities such as energy are traded in bilateral relations or within
regional blocs. The blocs are the structuring element in international relations. They include
backyards and spheres of infl uence and satellite states only loosely connected to a
bloc. Internally the blocs have a hierarchical structure. Their conceptual foundation is a
neorealist security doctrine. Bloc rivalry revolves around control of resource-rich countries
which, as at the end of the nineteenth and the start of the twentieth century, come
to realize that being rich in energy is a danger for weak nations as this awakens the greed
of the great powers. The major powers in the blocs have no qualms about using military
intervention to enforce their interests. This threat from without is the motivation for an
increasing number of natural resource exporting countries to build up arsenals of weapons
of mass destruction. The multilateral system of institutions experiences a rapid loss
of infl uence as actors in international organizations, from UNO to WTO, pursue their
own advantages and the readiness to take part in joint initiatives recedes.
The integration process within the EU stagnates, the single energy market is not completed,
and a common energy policy is not developed. Some of the larger member states
join forces in strategic alliances for energy procurement purposes. Import dependence
remains high and leads to an intensive use of nuclear energy and coal. There is a growing
tendency for countries to use their own reserves of fossil fuels domestically. The European
electricity and gas market interconnectors are cut back.
The transatlantic partnership is weakened because the USA prefers a concept of strategic
bilateralism and the European Union as an entity is no longer capable of action. US
energy relations are concentrated on the NAFTA states and Latin America, although here
left-wing populist governments hostile to the US present a permanent threat to security
of resources. As the reserves in its own regional bloc and backyard are no longer suffi
cient, the USA continues with massive interventions in the Middle East and maintains
strategic energy relations with Russia and West Africa. In so doing they are competing
with various European states and China. In the Caspian region confl icts develop with
Russia and individual European countries.
Russia succeeds in creating a regional bloc and in consolidating its position as a world
power. The oil and gas production from the states bordering the Caspian Sea is distributed
to Europe via the Russian pipeline system. A diversifi ed distribution structure makes
it possible to maintain bilateral supply relations with Europe, Asia, and the USA.
Development of production in the Caspian states and in Eastern Siberia means that
oil and gas supplies can be expanded and the “gas gap” of the fi rst decade of the century
is a thing of the past.
The Gulf Region remains a bone of contention between the regional blocs. The USA,
China, Japan, and the EU states intervene on a large scale but none of the interested parties
succeeds in bringing the region under control. Multi-layered confl icts continue here
– international, intraregional and internal – and numerous colluding interests. Largescale
consumers who see their security of supply threatened by the confl icts in the region
are tempted to intervene militarily. The states potentially under threat react by arming
themselves. In West Africa too, the notorious instability provokes attempts to stabilize
the oil and gas regions of the country from outside.

In Asia, heightened competition between China, India, and Japan can be anticipated
as export-led growth slows down in the wake of regional bloc building and slackening of
globalisation, and this leads to growing internal tensions. All three states are dependent
both on Russian oil and gas and on supplies from the Gulf but do not have a dominant
position in any of the arenas and are thus compelled to form alliances. To strengthen its
position and no longer be dependent on the US fl eet in the Gulf, China concentrates on
naval armament and deploys naval squadrons in the vicinity of the Gulf.
III.2 Multilateral Market Development and Market Regulation
In this scenario globalisation continues to make progress in the sense of an intensifi
cation of relations and interaction between states and regions. This process is accompanied
by a number of confl icts of a political, economic, social, ethnic, and religious
nature, but it is usually possible for the multilateral system of institutions to deal with
them, limiting their scope. Coordination of international production and trading systems
is left largely to the markets, with negative economic, social and environmental side-and
follow-up effects being systematically managed and balanced in a cooperative process in
multilateral institutions. The neoliberal US-led globalisation blueprint is replaced by a
system that gives greater weight to the interests of the newly industrialised and developing
countries. Concerted efforts in shaping globalization result in progress in the reduction
of disparities between the First and the Third World. The international community
of nations has at its disposal the institutional tools required to maintain macroeconomic
stability and to quell local confl icts using means such as military peace missions and the
fi ght against terrorism and drug traffi cking. A governance structure for the international
energy system is successfully developed which places the functioning of the markets on a
basis of multilateral regulations and mediation mechanisms that is acceptable to producing
and consuming countries alike.
The integration process within the EU continues and the Union expands as new
members join. The neighborhood policy makes it possible to create an area in which
rules differ beyond the borders of the member states. The single energy market is completed
and the transfer of national competences to the Union brings about a common
energy and energy foreign policy. The resource nationalism of some member states that
had repeatedly led to tensions and confl icts has been countered by the institutional tools
of the Community. Integration with Russia in the energy sector is pursued as a European
project and it is possible to create interdependences that go beyond the energy sector.
There continues to be a high degree of import dependency on Russia, but this is no
longer a signifi cant risk for security of energy supply.
Although US infl uence over the international competition and regulation agenda has
waned, the United States does not exclude itself from international cooperation and acts in
a constructive way in multilateral institutions. This makes transatlantic cooperation in the
development of international markets and the counteracting of negative effects easier. The
USA puts its dominance to use in areas such as peace missions and in establishing good
governance. In Latin America the USA extends progress in integrating the northern community
it heads to cover the energy sector too. Ways of harmonizing interests are sought
with the southern bloc, dominated by Brazil, where the largest part of energy reserves is
located. Despite aggressive advancement in the uses of non-fossil energy sources, the US
engagement in the Gulf region, Central Asia, and West Africa remains.
493

Russia has asserted its world power ambitions in relation to the neighboring states of
the former Soviet Union and has established itself as a regional power with global pretensions.
European solidarity has caused Russia to accept the European interdependence
concept for the energy sector. There are numerous Russo-European natural gas, LNG,
and crude oil projects in all phases of the production and trading chain. The stock of
foreign direct investment in Russia has grown at the same rate as Russian involvement in
European nations. The Russian share of global energy production is higher than its share
in world reserves; demand from Asia can also be met. Plans are aired to build up reserve
capacities in Russia so that the international energy system does not remain exclusively
dependent on the reserve capacity of Saudi Arabia.
By 2020, the Middle East and the Gulf states have not come much closer to overcoming
their many and varied internal and intergovernmental confl icts. In the case of the
big energy exporting states, these are still mainly autocratic rent economies that press
ahead with technological modernization but slow down or block the modernization of
their societies and the democratization of their political systems. Political Islam, however,
has separated itself further and in some countries Islamic parties have come into being
whose religious reference point makes them comparable to the Christian Democrats in
Europe. In Iraq and Iran the intensity of confl ict has weakened and rulers pursue – as in
Saudi Arabia – pragmatic policies of securing the fi nancial fl ows from oil and gas production.
To this end all three countries have developed ambitious investment projects
in cooperation with energy enterprises from client countries that include all the links in
the value chain. OPEC and GASPEC, together with the IEA, play a constructive, apolitical
role in coordinating an even supply to the markets. Oil and gas prices are kept in an
agreed corridor with the aid of buffer stocks. Most exclusively bilateral supply contracts
have expired, since open markets offer more favorable conditions. International confl icts
arising from the production, trade, and transport of oil and gas are handled by arbitration
bodies in international organizations, although they are not always solved. One remaining
hot-spot is West Africa, where several multilateral attempts to pacify the energy
producing zones have failed.
For China and India, where economic growth has slowed and energy effi ciency could
be clearly improved, suffi cient energy security is provided by concerted access to expanded
production in the Gulf and to the expanding Russian and Central Asian production,
meaning that the system of strategic bilateral supply contracts can be abandoned in favor
of the markets. Like other net importers, both countries take part in diverse investment
projects designed to help keep in step supply and demand developments in the international
energy system. Both scenarios are worlds apart. From a European perspective,
security of supply is greatest in the scenario of multilaterally supported balanced market
development. European energy security interests also call for a stance against the progressive
weakening of the multilateral apparatus of the institutions.
494
IV. POLITICAL COURSES OF ACTION
IV.1 Continue to develop risk-aversion mechanisms
Short-term risks to energy security (disasters, terror, political confl icts) can be controlled
by strategic provisions, cooperation, and the institutionalization of solidarity
mechanisms. In the case of natural gas, however – as with oil – minimum reserves in

the EU nations and rules for their collective use are required. The more developed the
integration of the single energy market, the better can bottlenecks or disruptions in supply
be absorbed. There are still too few interconnectors on the European gas market and
deeper integration would also be an advantage on the electricity market. An expansion
of the LNG infrastructure would also contribute towards improving the fl exibility of the
system. Short-and medium-term measures of this kind are, however, a necessary precondition
for energy security but not suffi cient in themselves.
IV.2 Initiate a turnaround
Climate change and the threat of a depletion of oil and gas reserves sooner or later
call for nothing less than a reorganization of the energy industry system. Preparation
for reaching the oil production plateau is a “classic risk management problem” (Hirsch),
calling inter alia for the development of transition formulas. Climate change marks the
vanishing point because it cannot be halted without a reduction in the use of fossil fuels.
From this follows that the development of technological alternatives at acceptable overall
economic costs is of decisive importance. Part of this is the utilization of savings potentials
as a source of energy.
IV.3 Strengthening multilateralism to reduce risks
Factors such as neorealist concepts and resource-nationalistic zero-sum games, the
priority given to bilateral procurement diplomacy in preference to cooperative solutions,
and the use of energy as an instrument of power by exporting countries all encourage an
increasing politicization of energy markets and pose a considerable risk in light of the
myriad divisions and opposing fronts (confl icts between the superpowers, North–South
confl icts, confl icts between producers and consumers, and so on). In this constellation,
Europe could assume an active role as the catalyst of a fair and effective multilateralism 67
and take the initiative of creating an international regulatory framework to make possible
a balancing of the complexity of interests. German commitment to multilateralism
would suggest that it take on an initiating function.
IV.4 Complete the single energy market and develop a common energy policy
Europe will have the power to negotiate in the formation of an international energy
system only if advances are made in the development and implementation of a common
European energy policy. To this end it is vital to create within the EU the legal conditions
for a common market and to transfer national competences to the Union. Completion of
the single energy market would not only create more internal competition, greater transparency,
and lower prices but would also strengthen negotiating positions with third parties
and facilitate the formulation of common interests. The inclusion of neighbors in the
EU single energy market is also conditional on the internal market working. Germany’s
political and economic weight means it could play a stimulating role.
67 Dirk Messner: The European Union: Protagonist in a Multilateral World Order or Peripheral
Power in the ‘Asia-Pacifi c’ Century?, in: IPG (Internationale Politik und Gesellschaft), Heft
1/ 2007.
495

IV.5 Reactivate the international negotiation process to create a common regulatory
system for energy security (synopsis of a multilateral negotiating process)
Urgent attention needs to be given to the deep-seated confl ict between countries dependent
on energy exports and energy imports – in which the producers have been able
to considerably strengthen their position by means of high energy prices, the increased
importance of their NOCs, and their control of an increasingly large part of global reserves
– and also to the latent confl ict between consumer countries. This means that
all actors must be included; the Western consumer countries, the producer and transit
states, the new large-scale importers such as China and India, and also the developing
countries that are dependent on energy imports. What is needed is an international
regime, a multilayered system for the reconciliation of interests capable of securing suffi
cient supplies of natural resources, stable resource fl ows to the producer countries, and
price levels that are also acceptable to economically weak countries. For a system of this
kind to function, principles must be established, rules agreed upon, and confl ict-solving
mechanisms developed.
The balance of power between the actors has shifted and the debate on a complex
and ambitious body of rules such as the Energy Charter (the core of which is a liberal
investment statute) is making no progress. It is thus necessary to fi rst launch a process
of debate and negotiation that makes it possible to clarify the basic issues before going
on to talk about universal international rules that limit national sovereignty rights. This
process of discussion could start with a review of the current situation and a comparison
between the different legal and regulatory systems in the various states, thereby indicating
what changes would be needed in each country as a result of the introduction of
an international regime. A common defi nition of energy security should be arrived at
through disclosure and examination of the differences, because as long as the European
idea of security of supply and, for example, the Russian idea of security of demand are
not reconciled, agreeing on common rules is an illusion.
An international forum could be a suitable framework for this discussion process.
Whether the International Energy Forum, in which several international organizations
and 60 countries participate – including the major production and consumer states – is
needed or another construction is something that should be examined. The main thing
is for the discussion process to be long-term and to evolve gradually, even if there is initially
no agreement on where it should lead to. Before or parallel to the forum process,
that is by defi nition broad-based and complex, and in order to get the process moving,
contentious issues could be settled or processed and clarifi ed prior to a formal discussion
using as a model the GATT Consultative Group of 18 (CG18). CG18 was a high-powered
technical concertation body that met to discuss contentious issues behind closed doors
between 1979 and 1987 and was of crucial importance in the preparation of the Uruguay
Round. 68 This could be combined with confi dence building measures in the preliminary
phases based on the example of the process once used in the CSCE process, as proposed
by Foreign Minister Steinmeier.
Whether the relaunch of the international negotiation process succeeds or not depends
not only on the approach adopted, but also on fl exibility and a readiness to com-
68 Richard Blackhurst: Reforming WTO Decision Making: Lessons from Singapore and Seattle,
Center for Research on Economic Development and Policy Reform, Working Paper No. 63,
Stanford, August 2000.
496

promise. As far as the OECD nations are concerned, in addition to abandoning bully
politics, concessions in at least three areas are required. (1) It must be understood that
common rules are not an instrument for imposing the interests of private companies in
the West on natural resource countries, as was sometimes the case in the transition phase
in Eastern Europe. The interests of large energy companies are not necessarily identical
with overall global interests. (2) Security of demand means not least the stabilizing of
energy resource income, which is closely linked to the stability of international prices.
There are ways of proceeding – very seldom used to date – based on the determination
in GATT on commodity agreements (Article XXh) and there is a wealth of experience
available on multilateral commodity agreements to which reference could be made. 69
(3) The aggressive debate directed against import dependence and in favor of substituting
imports with renewable energies and greater energy effi ciency has created opposing
camps. It would be much more productive to seek ways of involving exports of fossil fuels
in effi ciency and substitution initiatives. 70
The Author: Dietmar Dirmoser is a member of the International Policy Analysis section of the Friedrich-
Ebert-Stiftung and editor responsible for the journal “Internationale Politik und Gesellschaft”.
69 Manfred Tietzel: International Rohstoffpolitik. Eine Analyse der rohstoffpolitischen Aspekte
des Nord-Süd-Dialogs, 2. Edition, Bonn/Bad Godesberg 1978.
70 John V. Mitchell: Renewing Energy Security, loc.cit., p. 23.
497

498
SOLAR ENERGY IN GERMANY
This article was originally published by Friedrich-Ebert-Stiftung, London Offi ce,
London, 2006
Under the Red-Green government in Germany, solar energy has become a major area
of interest for future energy strategy. The present paper is based on information and data
published by the German solar energy business and describes central economic and energy
aspects of the development of solar power in Germany in the last years.
1. THE CASE FOR SOLAR ENERGY: ENERGY RESERVES ARE BECOMING
SCARCE, WITH IMPORTS RISING
The economy, consumers and the public purse are suffering increasingly from rising
energy prices. The cause: energy reserves are becoming scarce. Known oil reserves will
last only 46 years, and gas reserves only 66. With consumption levels remaining constant,
Uranium will last 49 years at the most. 1 Yet the International Energy Agency expects that
annual demand for energy will rise by 59% by 2030. 2 This will result in the time span of
available supplies decreasing even further. The problem is exacerbated by the growing
hunger for energy in Asia and the increasing dependence on the crisis-ridden regions of
the Near East, where the largest deposits of oil and gas exist.
Germany’s demand for energy is met by imports of up to 74%. 3 In the European Union,
the share of imports will rise from 50% at the end of the 1990s to 70% in 2020. 4 This
perilous dependence can only be solved in the long term by renewables, supply of which
is virtually limitless and the costs of which are continually falling.
Exploding energy prices herald scarcity
Long before the ultimate demise of oil and gas, valuable fuel will become scarce.
When the reserves have been about half-exploited, extraction rates will drop unavoidably.
Experts expect that even before 2010 the extraction maximum (peak oil) will be
overstepped. Despite state-of the-art extraction technology, the quantity of oil and gas
extracted will decrease year by year. 5
Rising demand with diminishing supply is forcing prices skywards. Crude-oil prices
have exploded and have tripled since January 2002 to over $67 a barrel. Even the oil
companies are aware of the critical trend, and CHEVRON writes in advertisements:
“The world consumes two barrels of oil for every new barrel discovered.” 6 Consumers
are clearly aware of the greater expense, with the price of heating oil having risen by 69%
1 BMU, The Turning Point for Energy and Renewables, July 200
2 IEA, World Energy Outlook, 2004
3 BMWA, Energy Data, August 2005
4 EU Commission, “Towards a European strategy for the security of energy supply”, 2000
5 ASPO, www.peakoil.net
6 Chevron, www.willyoujoinus.com

since January 2004. During this year, the value of all energy imports hit a new record at
EUR 53 billion – to the detriment of business and employment.
Renewable energy secures supply
Whilst around ten percent of power supply is covered by renewable energy in Germany
thanks to the law on feeding power to the national grid (1990) and the renewable energy
sources act (2000), the proportion of renewable energy for heating stands at only four percent.
For increased use of bio-energy, geothermal- and solar heat, there is as ever a dearth of
statutory provisions that allow investment to be made in favour of modern energy technology
and that safeguard this. In this respect, there is an urgent need to update policy.
2. MARKET DATA ON SOLAR HEAT AND PHOTOVOLTAIC TECHNOLOGY IN
GERMANY
Solar heat (solar heating systems)
Solar heating systems are utilised principally for heating drinking water, heating
houses, though also for producing steam or for powering refrigerating machines. In Germany,
solar collectors have been used for thirty years. Since the beginning of the 1990s
the market has experienced vigorous growth. With its 47% share, Germany today is the
largest solar heating market.
Heat output from installed solar-power plants Installed per annum in MW (th)
The German solar heating sector is a worldwide leader with highly developed systems.
In addition to the small- to medium-sized producers of solar power systems, those
also providing solar power systems are the heating industry and construction companies
such as roof-tile and roof-window manufacturers and façade companies. A growing
number of component manufacturers supply all over the world.
Use of solar heat is being promoted by the market-stimulation programme of the
German environment ministry. For plants that heat drinking water, investors obtain a
499

subsidy of EUR 135 per square metre of collector area. This is about 15% of the investment
outlay.
The solar heat sector employs about 10,000 staff throughout Germany in the production
of components and plant, marketing and installation of solar heating systems,
achieving a turnover of EUR 550 million in 2004.
500
Solar power (photovoltaic technology)
Solar power systems have been used for satellites since the 1950s. Following signifi -
cant price reductions they have been used since the 1970s at ground level. At the beginning
of the 1990s, what was proven in the 1,000-roof scheme was that operation of
numerous solar power systems in the power grid is completely problem-free. Since the
start of the 100,000-roof scheme in 1999 and of the renewable energy sources act (EEG)
coming into force in April 2000, the market for solar power has experienced vigorous
growth in Germany. In 2003, the 100,000-roof scheme terminated, which allocated credit
for solar power systems at favourable rates of interest. Since 2004, they are promoted
only with increased compensation as part of the renewable energy sources act, with no
more subsidies from the federal budget.
Through the government’s market-launch policy, supported by the CDU/CSU, a modern
and forward-looking industry was able to develop. Over forty companies produce
solar power components at all stages of the production chain. A number of companies
are listed on the stock-exchange (Börse) and are among the top companies worldwide.
The solar power sector employs 20,000 people in Germany, achieving a turnover of EUR
1.7 billion in 2004.
Installed photovoltaic output 1992 – 2004 Installed per annum in MWp (el)
Due to the sustained market-launch policy, Germany has turned into the leading market
in solar systems. Photovoltaic technology is currently growing more strongly than
solar heat. Market growth has led to the development of a highly dynamic solar-power
industry, with 30,000 jobs and turnover of EUR 2 billion in 2004.

3. SOLAR ENERGY AS A DRIVING FORCE FOR EMPLOYMENT
Turnover for the solar power sector in 2005: EUR 2.7 billion
Development in the solar technology market is highly dynamic, and is increasingly
becoming a factor in the economy. Over the last fi ve years, the turnover of the German
solar power sector has increased by an average of 43% per annum. A turnover of EUR 2.7
billion is expected in the sector for 2005.
The solar-power sector today: 30,000 jobs
The solar-power sector, still in its prime, is effectively a driving force for job-creation.
Over 30,000 people are today employed in production, distribution and installation of solar
systems (in photovoltaic technology: 20,000; solar heat: 10,000). In the past year alone,
5,000 new jobs were created the booming photovoltaic-technology sector. This is how there
will soon be almost as many employed in this sector as in hard-coal mining in Germany.
What makes solar power a driving force for job-creation is the very high proportion
of added value of approx. 80% at domestic level compared with conventional energy,
together with the high proportion of small- to medium-sized businesses and manual labour.
Solar power has enormous growth potential – in Germany and worldwide. German
manufacturers have earned a peak position on the international stage in terms of
technology. The signifi cance of exports grows continually. Under a suitable regulatory
framework, associations involved with solar power are counting on a total of 200,000 jobs
over the next fi fteen years in Germany.
Renewable energy: 130,000 jobs today
Today already, renewable energy provides employment for 130,000 people in the sectors
of wind, water, biomass, geothermal energy, solar heating and solar power. This engages
more people than in nuclear energy, hard coal and brown coal put together. 7 These
are splendid prospects: by 2020 it is expected that 500,000 people will be employed in
renewables. 8 This sector achieved a turnover of EUR 11.5 billion in 2004. Of this, EUR
6.5 billion has been invested in new plant for the generation of power, heat and fuels. Renewables
make up a highly infl uential programme for growth, and by 2020 investments
totalling EUR 200 billion are expected.
4. WHEN WILL SOLAR POWER BECOME COMPETITIVE?
From 2018, solar power will be cheaper than conventional power The German renewable
energy sources act envisages a reduction of 5-6.5% per annum in refunds for solar
power fed into the grid. The average price of one kilowatt-hour (kWh) of solar power will
decrease nominally at 5% per annum from 49 cents today to 23 cents in 2020.
Conventional power on the other hand will become dearer. At a minor increase of 2.5%
per annum, the price of power will rise for the private consumer from 19.6 cents/kWh to-
7 BMWA, German Nuclear Forum, Society for Nuclear Technology, IGBCE, DEBRIV
8 www.unendlich-viel-energie.de, Essen Declaration (Website translation: ‘limitless energy’)
501

day to 28 cents/kWh in 2020. This way, solar power for the private customer will be cheaper
from 2018 than obtaining conventional power.
502
Solar power systems today are more than 60% cheaper than 1990
The theory of the learning curve shows that every doubling of photovoltaic output
leads to a 20% fall in price. This has also been confi rmed in Germany: since 1990 the
price of photovoltaic systems has fallen over 60% from EUR 13,500 to about EUR 5,000
today. Between 1999 and 2003, the fall in price was 25% in the 100,000-roofs scheme.
By way of international comparison, prices of solar power modules show a continual
downward trend. However, further price decreases are only possible if mass-production
undergoes further expansion, with thorough research and development in progress at
the same time.
Continuous price fall for solar-power system
p p
(Price of module in $ per Watt)
Solar power systems achieve a 6.5% return
In Germany, almost all solar power systems are linked to the power grid, and feed the
generated solar power into the grid. Producers receive a fi xed refund over twenty years
for this, depending on the size of the system and the installation.
As a result of the guaranteed refund over twenty years, the system operator achieves
an annual return which covers his risk. Because large systems are cheaper per unit of
power than small systems, lower levels of refund are given for these. In central and northern
Germany, the power yield is somewhat lower than in southern Germany, resulting
in lower returns.
Typical data of a solar-power system on a private house
Size of plant: 2 kilowatts (kW), 20 m 2 module area
Price: approx. EUR 5,000 per kW
Power yield: approx. 950 kWh per kW in southern Germany
Refund for feeding power to grid: 54.53 cents/kWh = EUR 518 per annum per kW
Period of refunds: 20 years
Returns: approx. 6.5% per annum with all costs taken into consideration

Being in its prime, photovoltaic technology still has an enormous potential for cost cutting.
However, this can only be achieved if the quantities produced continue to rise sharply,
and there is thorough research and development in parallel to this. Prices are falling continuously,
and bear testimony to the correlation between market- and price trends.
General Data Solar Market Germany 2004
Solar heat (Solar heating system) Photovoltaic technology (Solar power)
Amount of power generated 2.3 TWh 1.0 TWh
Power from newly installed plants 525 MW(th) 360 MW (el)
Cell area newly installed 750,000 m2 3,300,000 m2
Total cell area installed 5,770,000 m2 6,900,000 m2
Number of newly installed systems 83,000 40,000
Turnover 550 Mio € 1.7 bn
Jobs 10,000 20,000
Market growth + 5% >100%
Market growth for 2005 (forecast) + 20% +20%
Sources:
1. Versorgungssicherheit ohne Solarenergie in Gefahr
2. Marktdaten Solarwärme und Photovoltaik
3. Jobmotor Solarenergie
4. Wann wird Solarstrom wettbewerbsfähig?
All: Bundesverband Solarindustrie
Stralauer Platz 34
10243 Berlin
http://www.bsi-solar.de/
503

504
INTERNATIONAL CLIMATE POLICY 2020
Ott, Hermann E.
This article authored by Hermann E. Ott, was originally published by Friedrich-Ebert-
Stiftung, Department for Development Policy, Berlin, 2007
ABSTRACT
Climate change is rapidly becoming a key issue of German foreign policy and international
co-operation. The very long-term effects involved and their often unjust distribution
across the world make climate change a real challenge for the whole human race as
well as for individual states like Germany.’
This year’s fourth Assessment Report of the Intergovernmental Panel on Climate
Change (IPCC) has further underlined the warning of the dangers posed by a change in
the world’s climate. Even traditional economists like Sir Nicholas Stern are taking climate
change extremely seriously. Stern estimates that rapid action would cost about one percent
of the global gross domestic product, whereas failure to act would cost up to 20 percent.
Three possible scenarios for the future development of climate policy will be presented
below.
In the fi rst scenario nothing is done and the negotiations on continuing with the
Kyoto Protocol fail (business as usual). The concentration of greenhouse gases in the
atmosphere steadily increases and in 2020 exceeds the limit of tolerance below which
a warming rate of just +2°C would still be possible. By 2100, temperatures rise by up to
4.5°C. At this point all projections break down, as the face of the earth would change so
much as to make it unrecognizable.
In the second scenario negotiations continue, but aimlessly and on the basis of the
same old growth premises. Promotion of the major technologies (nuclear, coal, large biomass,
large hydropower) is insuffi cient to prevent climate change. The absence of a revolution
in the fi eld of renewable sources of energy and the failure to use energy effi ciently
lead to a sharp rise in CO 2 emissions. As these missed opportunities in the conservative
structural approach are unlikely to repeat themselves, the world might relapse into the
fi rst scenario.
In the third scenario rapid action is taken on an equitable basis. This assumes that
the international climate negotiations for the period after 2012 are brought to a speedy
conclusion with social compensation for those affected. Every country in the world must
make its contribution to combating climate change with determination and effi ciency.
One of the main obligations of the rich nations is to fi nance measures in the developing
and newly industrializing countries. At the national level these obligations include using
energy more effi ciently, promoting regenerative sources of energy, and creating a decentralized
energy system. Ultimately, the interplay of all these aspects gives the world a
chance to keep global warming below +2°C. This scenario also entails extensive adaptive
measures, but it could stave off catastrophe.
This last scenario should be the aim of German climate diplomacy. But fi rst a credible
national climate policy is needed plus massive promotion of climate-protection and

adaptive measures in the southern hemisphere. The conditions for an effective climate
policy are good. By pursuing a consistent global public policy Germany has the opportunity
to perform a service for itself, Europe and the world.
I. BACKGROUND – WHAT IS THE SITUATION? 1
In recent years a crucial issue has increasingly occupied the attention of those responsible
for foreign and security policy: the environment in general and climate in particular.
Along with the aim of securing a reliable energy supply (“energy security”) the danger
of far-reaching environmental changes calls for a paradigm shift in foreign policy. 2 The
resulting challenges are of an intellectual, conceptual and organizational nature, since
the whole problem of climate has a highly complex structure.
The chains of cause and effect in the climate system are not yet fully understood – in
short, things could get worse than has hitherto been assumed. The effects of human activity
only make themselves felt after a lapse of decades or even centuries. In addition, these
effects are often not felt by those who cause them. Furthermore, the causes of climate
change (the use of fossil fuels and the clearing of the tropical rain forests) are numbered
in millions and spread all over the globe. The fact that these fuels form the energy base
of our mechanized civilization makes everything even more diffi cult. Moreover, both our
economic and our political systems are not remotely capable of coping with a change in
the global environment. Last but not least, the human planning and interest horizon – so
far at any rate – is not really up to the challenges of global, long-term, structural change.
I.1 Climate change – facts and costs
The message was not exactly revolutionary, but it had a very marked effect on the
public, because it came from a “traditional” economist: “The scientifi c evidence is now
overwhelming: climate change is a serious global threat and demands an urgent global
response.” Those words were written by Sir Nicholas Stern, a former chief economist at the
World Bank and now head of Britain’s Government Economic Service, in the report that
bears his name. This report attracted a good deal of international attention when it was
published in October 2006. 3 Although the consequences of climate change, as set forth by
Stern, and its economic challenges seem shocking, they are essentially nothing new.
Since the 1960s better and more reliable data have been forthcoming with every passing
year. And all the data – whether they are atmospheric measurements, ice core analyses,
satellite photos or climate statistics – point in the same direction: over the past 50
1 I should like to thank Florian Mersmann for his valuable support. I am also very grateful to
Wolfgang Sterk, Rie Watanabe, Jochen Luhmann and Malte Meinshausen for their comments and
suggestions.
2 Cf. Sachs, Wolfgang/Ott, Hermann E.: Öljunkies auf Entzug! Umweltpolitik ist Ressourcenpolitik
ist Sicherheitspolitik. Neue Herausforderungen für die Außenpolitik. In: Internationale Politik,
Vol. 62, 2/2007, pp. 6-15. English edition: Sachs, Wolfgang / Ott, Hermann E.: A New Foreign Policy
Agenda. Environmental Politics is Resource Politics is Peace Politics. In: Internationale Politik, Journal
of the German Council on Foreign Relations (IP-Global Edition), Vol. 8, 1/2007, pp.16-22
3 Stern, Nicholas: The Economics of Climate Change. The Stern Review. Cambridge University
Press, 2007, www.hm-treasury.gov.uk/independent_reviews/stern_review_economics_climate_
change/sternreview_index.cfm.
505

years the average global temperature has risen considerably – and it is the effects of our
own actions that are changing the face of the earth.
In 1988, the World Meteorological Organization (WMO) and the United Nations Environment
Programme (UNEP) set up the Intergovernmental Panel on Climate Change
(IPCC) to analyse the reasons for climate change and its possible consequences as well as
to consider what action should be taken. This body does not conduct any research itself,
but compiles all the latest research in a very thorough manner. Each report is drawn up
by several hundred scientists and reviewed by up to 2,000 other scientists over a period
of years. In 1990 this UN “Climate Council” published its fi rst Assessment Report, which
was followed by two others in 1995 and 2001. In the course of 2007 the fourth Assessment
Report (AR4) have been issued in several sections. With each report the data have
become more exact and irrefutable.
Although the fi nal versions of the reports are highly politicized (and hence watered
down), the IPCC’s fourth report contains startling fi ndings and concludes that the undiminished
emission of greenhouse gases at present levels can have catastrophic consequences.
4
The worst-case scenario – which assumes that nothing is going to change – would
thus unfold in the following phases (time scale from the report of the IPCC’s Working
Group II):
– 2020 (+1°C): 30 to 40% of all known species increasingly threatened with extinction,
most coral reefs bleached. Heat waves, fl oods and droughts drive up mortality rates.
– 2050 (+2°C): Climate change causes major upsets in biological systems with mostly
negative impacts on biodiversity and the food and water supply. Many millions of
people all over the world live in coastal areas acutely threatened by fl ooding.
– 2050-2080 (+3°C): The strain on the world’s health systems grows. World food production
drops dramatically. About 30% of the earth’s humid areas have dried up.
– 2080 (+4°C): Over 40% of plant and animal species have become extinct. The world’s
gross domestic product declines by up to 5%. The at least partial melting of the ice
caps in Greenland and the Antarctic causes the sea level to rise by a further four to
six metres.
These are sombre visions of the future, but the effects of climate change can be observed
even today. Physical systems (e.g. glaciers, ice caps, lakes, etc.) and biological systems
(e.g. the distribution areas of various species) are already showing signs of regional
climate changes, especially temperature rises. Cultivated and human systems are also
affected. In Europe and Asia, for example, the mortality rate has increased as a result of
heat waves (the one in Europe in 2003 claimed an estimated 30,000 lives). Furthermore,
the agricultural cycle in the northern hemisphere has already changed.
Each rise in temperature makes global water and food resources scarcer, places a
greater strain on ecosystems including the extinction of a large number of plant and animal
species, increases the threat to millions of people in coastal areas and river estuaries,
and causes an alarming increase in tropical diseases, allergies, climate-related diseases
and fatalities. The greater the change in temperature, the more drastic the effects.
As the time scale indicates, the dangers of climate change will increase greatly as
time goes on. Even if the mean temperature rise could be stabilized at a mere +1.5°C (in
relation to 1980-1999), the health hazard would increase considerably, fl oods and storms
would occur with greater frequency, and the corals would die. The more the temperature
506
4 All the IPCC reports are available at www.ipcc.org.

ises in the future, the graver the consequences for man and nature will be. If the temperature
rises by more than 3.5°C, all systems – biological, physical and social – will exceed
the limits of adaptation. We may not know exactly what such a future would look like in
practice, especially in badly affected regions such as the Arctic, sub-Saharan Africa or the
Asian river deltas, which would be hit by massive fl oods. But, as NASA scientist James
Hansen warns, it would certainly be a “different world”.
A rapid reduction in greenhouse gas emissions by switching to a non-fossil-based
path of development could, indeed, mitigate many of the effects indicated above. But as
some climate changes can no longer be halted, other far-reaching adjustment measures
will have to be taken as well. There is a wide range of options. But technological measures
(e.g. the building of dams, infrastructure schemes), will have to go hand in hand with
changes in human behaviour (e.g. eating habits) and preventive political and economic
measures, targets and standards if an effective stop is to be put to climate change.
The IPCC scientists are therefore insisting that rapid and comprehensive adjustment
and climate-protection measures be taken as quickly as possible, because a belated reaction
would lead to irreversible damage and the costs will rise with every delay.
This call coincides with the already quoted assessment of Sir Nicholas Stern, who
considers comprehensive adjustment measures to be a matter of urgency and believes
that the costs of avoiding climate change will be considerably less than the anticipated
losses. In the “Review on the Economics of Climate Change” published in 2006, Stern
and his team studied the economic challenges and opportunities arising from climate
change. Surprisingly, the liberal mainstream economist Stern comes to the radical conclusion
that climate change is “the greatest market failure the world has ever seen”.
The Stern Report, which runs to almost 600 pages, begins by examining the expected
climate changes foreseen in various scenarios in order to determine their effects on the
economic and social well-being of societies and individuals, before going on to analyse
possible countermeasures. There follows a calculation, using different economic methods
and modelling techniques, of the anticipated costs of action and inaction respectively.
Finally, political options for reducing greenhouse gases and for the necessary adjustment
to the now inevitable climate change are presented and forms of international
co-operation proposed.
Like the IPCC scientists, Stern underlines the economic advantages of taking early and
decisive action, contrasting them with the costs to be expected in the case of delay. According
to his calculations, the costs of taking instant action can be limited to about one percent
of the global gross domestic product (GDP). In his view, that is expensive, but tolerable. It
corresponds roughly to the amount spent every year in the world on advertising or to the
cost of a global ’fl u epidemic, as estimated by the World Bank. 5 It should be noted, however,
that Stern bases his calculations on a scenario which assumes a stabilisation at a level of
6 550 ppm CO – i.e. far more than a limitation to 2°C would allow. A stabilisation at 450
2eq
ppm CO would therefore cost somewhat more than one percent of the global GDP.
2eq
However, these calculations must be seen in relation to the costs of climate change.
Should no measures be taken at all (the “business-as-usual case”), Stern sees the possibility
of the resulting damage costing up to 20 percent of the global GDP for the next 200
5 Gaby Hinsliff: Landmark report reveals apocalyptic cost of global warming. In: The Observer,
29 October 2006.
6 The concentration of all greenhouse gases in the atmosphere is expressed in CO2 equivalents,
abbreviated as CO .
2eq
507

years or at least “fi ve percent of global GDP each year, now and for ever”. The enormous
margin this represents is the result of the more or less conservative method of calculation:
the lower fi ve percent are merely the results of the model used (PAGE 2002). These
costs would rise to 11 percent of GDP if account were taken of factors that have so far
proved resistant to modelling, such as the effects on the environment and human health.
Other factors not reproduced include the risk of the climate system being more vulnerable
than expected and the fact that a disproportionate share of the losses will occur in
the poor countries of the southern hemisphere.
Thus in purely economic terms the possible losses for the business-as-usual case
amount to up to 20 percent of global GDP. These are the fi nancial resources which, on
average, would no longer be at the world’s disposal each year – an inconceivable sum.
The report attempts to illustrate its dramatic nature by pointing out that the effect of climate
change on our economic and social well-being would correspond roughly to that of
the two world wars or the Great Depression in the fi rst half of the 20th century.
Nevertheless, Nicholas Stern would like us to see climate change not only as a threat,
but also as an opportunity for the world economy. The development of emissions trading
systems, the technological developments initiated by climate policy, and the mechanisms
created by the Kyoto Protocol (see below) could open up new markets and trading opportunities.
In his view, climate change will not necessarily turn out to be a brake on growth.
On the contrary, it harbours tremendous potential for development, not least in developing
and newly industrialized countries. Here the liberal mainstream economist adds his
voice to the predictions that have been made by German and international ecologists for
some time now. This is shown by a quotation from the report: “The pro-growth strategy
for the longer term is tackling climate change – which can be done in a way that does not
cap any countries’ aspirations for growth.” 7
Climate change is a global phenomenon requiring a joint response by all countries.
Stern therefore calls for a binding international framework in which a combination of
emissions trading, technical co-operation, reduced deforestation and adjustment measures
can be agreed upon. In his opinion, climate change cannot be explained away, but its
worst consequences can be averted by rapid and effective international co-operation.
508
I.2 Diplomacy in defence of the climate
Climate diplomacy is less than 20 years old, since it was only in 1990 that the negotiating
delegations met for the fi rst time to create a basis in international law for co-operation
in tackling climate change. 8 The negotiations culminated in the United Nations
Framework Convention on Climate Change in May 1992 in New York. The fi nished text
of the treaty was then signed in June 1992 with great fanfare at the “Earth Summit” in Rio
de Janeiro by the 150 heads of state and government assembled there.
This convention can hardly be counted a great success. Since the delegations were
unable to agree on concrete and, above all, binding measures on the reduction of cli-
7 Stern, Nicholas: The Economics of Climate Change. The Stern Review. Cambridge University
Press, 2007, p.ii.
8 Cf. Oberthür, Sebastian/Ott, Hermann E.: Das Kyoto Protokoll. Internationale Klimapolitik
für das 21. Jahrhundert. Opladen 2000. English version: Oberthür, Sebastian / Ott, Hermann E.:
The Kyoto Protocol. International Climate Policy for the 21st Century; Springer Verlag (Berlin, Heidelberg
et al.) 1999.

mate change, the more non-committal form of a “framework convention” was chosen
and limited to co-operation in research with the prospect of closer co-operation in future.
This approach was in keeping with the fi ndings of the late 1980s and 1990s, namely
that international environmental problems can best be solved in a gradual process: from
the approval of non-binding “action plans” through the conclusion of an international
framework agreement to the drafting of a protocol with binding targets. This approach
had already been successfully adopted in the combating of air pollution in Europe (cf. the
1979 Geneva Convention on Long-range, Transboundary Air Pollution, LRTAP) and had
also functioned very well in the international measures to protect the ozone layer (1985
Vienna Convention and 1987 Montreal Protocol).
As soon as the Framework Convention on Climate Change entered into force in March
1994, negotiations accordingly began on a reduction protocol. At the “First Conference of
the Parties” or COP1 held one year later in Berlin a mandate for these negotiations was approved
under the chairmanship of the then minister for the environment, Angela Merkel.
The time frame in the “Berlin Mandate” for the adoption of a protocol was deliberately
kept tight and a negotiating marathon of nine rounds eventually led to the adoption of the
Kyoto Protocol in autumn 1997. 9 Any assessment of this protocol is necessarily ambivalent.
On the one hand, it may rightly be described as a “milestone” in the history of ecological
foreign policy, as it marked the fi rst-ever specifi cation of upper limits for the emission of
climate-polluting gases. On the other hand, it fell far short of what was needed to tackle
climate change effectively, because the reduction targets envisaged – representing about
fi ve percent of all the emissions of the industrialized countries – were too low.
Yet the boldness of the draft of the Kyoto Protocol is made clear by the fact that even
the relatively modest reduction commitments agreed upon were subjected to yet another
revision. A suitable opportunity for such a revision arose from the fact that there had not
been time to put the protocol into its fi nal form. Although agreement had been reached
on an obligation to reduce greenhouse gases differentiated by countries, in the text of
the treaty itself the instruments necessary for implementation had only been enshrined
in rudimentary form.
For this reason negotiations recommenced in 1998 under the chairmanship of the
fi rst Green minister for the environment, Jürgen Trittin, and continued up to that dramatic
moment at the end of 2000 when the conference in The Hague broke up without
result. As of March 2001 the negotiations seemed fi nally doomed when the new US
president, George W. Bush, declared his “opposition” to the Kyoto Protocol in a letter to
members of Congress. This rejection weighed heavily on the situation, since the U.S., as
the world’s leading political, military and economic nation, is practically indispensable
for any global task. Furthermore, the U.S., which accounts for about four percent of the
world’s population, is responsible for 25 percent of the world’s emissions of greenhouse
gases, and any arrangement reached without it would necessarily be of limited effect. On
the other hand, this demonstrative rejection was also the occasion for an equally demonstrative
rallying of the remaining rest of the world – it is even possible that without this
rejection by the US president no agreement would have been reached at all. The EU and
virtually all the developing countries sorted out their differences, agreed on the broad
9 On the content cf. Oberthür/Ott 2000; Yamin, Farhana/Depledge, Johanna: The International
Climate Change Regime. A Guide to Rules, Institutions and Procedures, Cambridge University
Press, 2004, and Ott, Hermann E.: The Kyoto Protocol. Unfi nished Business. In: Environment, Vol.
40, No. 6 (1998), pp. 16-20, 41-45.
509

outline in Bonn in mid-2001, and at the end of 2001 in Marrakech they approved the socalled
“Marrakech Accords”, which supplemented the Kyoto Protocol.
The fortunate passing of these supplementary regulations was of course favourably
infl uenced by the broader political context. After the terror attacks of 11 September the
U.S. was more dependent than ever on the active support of the world in the struggle
against terror. In late 2001 this worldwide solidarity was still unbroken and the U.S.
did not want to jeopardize it by an obstinate rejection of the further development of the
Kyoto Protocol.
In return for its non-intervention, however, the U.S. forced through far-reaching
amendments to the Kyoto Protocol, for example the allowance for “sinks”, i.e. the storing
of carbon in plants, which further restricted the treaty’s effectiveness. These and other
measures led to a reduction to about two percent of the industrialized countries’ original
pledge of fi ve percent. Nevertheless, the protocol was still workable with the Marrakech
Accords and could be ratifi ed. In particular, the “fl exible mechanisms” – the market instruments
of emissions trading, Joint Implementation (JI), and the Clean Development
Mechanism (CDM) – had been worked out, which made it much easier for the industrialized
countries to ratify.
Nevertheless it took over three more years – till the end of 2004 – before the protocol
had been ratifi ed by the 55 states responsible for 55 percent of the industrialized countries’
emissions. The fact that it took so long was mainly due to a delaying strategy on the
part of Russia, whose ratifi cation was required for formal reasons. Russia made full use
of its negotiating advantage. Only after the European Union abandoned its resistance to
Russia’s joining the WTO was the Kyoto Protocol ratifi ed by the Russian parliament. It
entered into force on 16 February 2005, three months after Russia’s ratifi cation document
was fi led with the UN Secretary General in New York.
At this point the dynamic nature of the climate regime was again made clear, and
negotiations on a revision of the treaty beginning immediately after the protocol entered
into force, as had happened in the case of the Framework Convention. The was attributable
to the fact that the commitments made by the industrialized countries were limited
to a period of just fi ve years – from 2008 to 2012. In a strictly legal sense, the emissions of
all the states, which had entered into commitments, could subsequently increase again
unhindered. This performance period had originally been set to compensate for economic
fl uctuations which might have made it impossible for a state to meet its obligations if
it were tied to a specifi c target year. As the formulation “and for the period thereafter”
had not been added, the negotiations for the period after 2012 had to start again more or
less from scratch.
The negotiations for a “post-2012” regulation of the reduction pledges began at the
fi rst Meeting of the Parties to the Kyoto Protocol in Montreal (COP/MOP1) in 2005. 10 The
German delegation was headed for the fi rst time by the newly appointed minister for
the environment, Sigmar Gabriel. The result could only disappoint those familiar with
the urgency of the climate problem, as neither a clear mandate nor a specifi c completion
date was agreed upon. The fi rst Meeting of the Parties to the Kyoto Protocol (COP/MOP1)
produced neither a concrete mandate to expand the pledges for industrialized countries
10 Wittneben, Bettina/Sterk, Wolfgang/Ott, Hermann E./Brouns, Bernd: The Montreal Climate
Summit. Starting the Kyoto Business and Preparing for post-2012. The Kyoto Protocol’s First Meeting
of the Parties (MOP 1) and COP 11 of the UNFCCC. In: Journal for European Environmental
and Planning Law (JEEPL) 2/2006, pp. 90-100.
510

nor a mandate to admit important newly industrialized countries to the group of signatory
states.
To put this bad impression in perspective, however, one must remember the laboured
pace of the negotiations and the enormous resistance to a speedy procedure. This applies
not only to the U.S., which has not changed its attitude to the Kyoto Protocol even in the
fi nal phase of George W. Bush’s presidency. Nor does it apply only to Japan, which after
a brief phase of active climate policy in the late 1990s has lapsed into a state of political
rigidity that renders an effective domestic or foreign climate policy impossible. The greatest
impediment to a rapid agreement on extending the climate regime lies rather in the
abstruse negotiating logic which dictates that progressive industrialized countries are at
permanent loggerheads with the large developing countries, as if they were engaged in
trench warfare. Instead of focusing on common interests, the negotiations are seen as a
zero-sum game in which one side loses what the other side gains. If the climate negotiations
are to be effective, this division must be overcome.
A snapshot of the climate negotiations in mid-2007 may serve to illustrate the character
of this trench warfare. In Montreal the parties to the Kyoto Protocol set up an “Ad-hoc
Working Group (AWG) on Article 3.9 of the Kyoto Protocol”. 11 The AWG is only supposed
to deliberate on the reduction pledges of the industrialized countries, while the involvement
of the previously excluded developing countries is expressly not part of its mandate.
Nor has agreement been reached on setting specifi c targets or deadlines. Hence there
has been no change since the Second Conference of the Parties in Nairobi in late 2006. 12
Failure to agree on a concrete negotiating timetable there foundered on the opposition of
the industrialized countries, which did not want to make the fi rst move until the developing
countries agreed on a timetable for new pledges for themselves. On the other hand,
the EU’s attempt to include the urgently needed long-term target of a global temperature
rise not exceeding 2°C was frustrated by the G77 and China. So the year 2007 was devoted
to the discussion of potential reductions.
The other side of these negotiations was the industrialized countries’ attempt to win
acceptance for a timetable for the revision of the Kyoto Protocol under Article 9 of the
treaty. This revision, in contrast to Article 3.9 mentioned above, provides an opportunity
to discuss not only the appropriateness of the duties of industrialized countries, but
also the effectiveness of the protocol as a whole, including the question of whether the
developing and newly industrialized countries should not be more closely involved. This
was opposed by the developing countries, which wanted to gain time by waiting to see
how ambitious the industrialized countries would make their next, post-2012 pledges.
Finally, agreement was reached on a timetable for the revision, but with the proviso that
the results of this revision could not be made the basis for new pledges, for which formal
negotiations would have to be initiated.
In the end, the convention did make allowance for a process of dialogue, which however
was expressly forbidden to comprise any negotiations. The thinking behind this
had originally been to bring in the U.S. and Australia, which had not ratifi ed the Kyoto
Protocol and were consequently not part of the post-2012 negotiations envisaged by the
11 See also Ehrmann, Markus: Das internationale Klimaschutzregime nach Montreal. In:
Zeitschrift für europäisches Umwelt- und Planungsrecht (EuUP), 1/2006, pp. 37-44.
12 Cf. Sterk, Wolfgang/Ott, Hermann E./Watanabe, Rie/Wittneben, Bettina: The Nairobi Climate
Change Summit (COP 12 – MOP 2). Taking a Deep Breath before Negotiating Post-2012 Targets?
In: Journal for European Environmental & Planning Law (JEEPL) 2/2007, pp. 139-148.
511

protocol. After Montreal the convention process got off to a promising start, although
after a year it had run out of steam.
Apart from the global climate negotiations under UN auspices, the fi rst decade of the
new century witnessed a number of international initiatives – mainly supported by the
U.S. – to promote certain technologies. The Asia-Pacifi c Partnership for Clean Development
and Climate 13 , in particular, achieved a certain notoriety, since it had been initiated
by the U.S. for the purpose of developing an alternative to the Kyoto Protocol. This
partnership was introduced to the public in July 2005 at a meeting of the Association of
South-East Asian Nations. The other signatory states apart from the U.S. were Australia,
China, India, Japan and South Korea. Some meetings took place, but because of their
non-binding character they failed to live up to their promise of genuine co-operation on
new technologies.
Other co-operation agreements for specifi c technologies are the Carbon Sequestration
Leadership Forum (http://www.cslforum.org/about.htm) to promote capture and storage
technologies for greenhouse gases; the “Methane to Markets” programme (http://www.
methanetomarkets.org/) for developing technologies to capture methane gases from
waste disposal sites, for example; and the International Partnership for the Hydrogen
Economy (http://www.iphe.net/) for co-operation in the fi eld of hydrogen technologies.
The two last-named initiatives include Germany among their members. These platforms
for technological co-operation are generally non-binding and of limited effectiveness
with regard to the avoidance of greenhouse gas emissions. So this form of co-operation
does not match up to the scale of the threat posed by climate change.
An appropriate response to the challenges of climate change was sought above all
from the group of the eight main industrialized countries (G8). At the urging of the British
presidency the participants in the 2005 G8 summit meeting in Gleneagles, Scotland,
agreed to fi nd a joint solution for the deadlocked international negotiations. This “Gleneagles
process” was then continued under subsequent G8 presidencies with the aim of
reaching an agreement in 2008 under the Japanese presidency. The aim of the Gleneagles
process and the G8 initiatives is to involve, in addition to the eight established G8 states,
the largest and most important newly industrialized countries (Brazil, China, India, Mexico
and South Africa) in a climate timetable. At the same time a support plan for Africa
was initiated in order to implement the millennium goals of the United Nations without
driving the poorer developing countries into opposition.
It was no coincidence that the impetus for this G8 initiative came from the UK, where
an enlightened business elite had been convinced of the reality of climate change since
the dawn of the new millennium. In particular, John Browne, the Chief Executive of BP,
had launched his company on a new course (“beyond petroleum”) as early as 1998. A few
years later the British government and a few large companies reached a consensus on
the following points: fi rst of all, climate change was a reality; secondly, this danger could
only be combated with funds from the global fi nancial markets and the big companies;
and thirdly, global regulatory measures should be designed to allow fi nancial markets
and companies to profi t from them. One concrete result of this agreement was the creation
by the British presidency of the Gleneagles process in 2005 within the framework
of the G8.
13 Asia Pacifi c Partnership for Clean Development and Climate, http://www.asiapacifi cpartnership.org/.
512

II. GERMANY’S CLIMATE DIPLOMACY
For the past 30 years German foreign policy has been intertwined with environmental
and, more specifi cally, climate policy. This is primarily because of the traditionally important
role environmental policy has played in German foreign policy and because of the
country’s perception of itself as an international actor. A progressive, forward-looking
environmental and climate policy can be traced across all political parties. It began at the
time of the Social Democrat-Liberal coalition in the early 1970s, when the then interior
minister and FDP (Liberal) politician Hans-Dietrich Genscher recognized environmental
policy as an important element in the rehabilitation of the Federal Republic after the Second
World War and took corresponding initiatives. Germany’s accession to the United
Nations in 1973 was at least partly due to Germany’s active involvement in the UN Stockholm
Conference on the Human Environment in 1972.
The Christian Democratic era began under the aegis of Klaus Töpfer, who as minister
for the environment helped negotiate the Climate Convention and attended the 1992
Earth Summit in Rio – an important step on the way to his later appointment as Executive
Director of the United Nations Environment Programme (UNEP). In 1995 it fell to
the young minister for the environment, Angela Merkel, to chair the fi rst Conference of
the Parties to the Framework Convention on Climate Change in Berlin. Under her chairmanship
a mandate was approved to negotiate a climate-protection protocol. Chancellor
Helmut Kohl lent his active support to the continuation of the negotiations, opening the
conference himself and proving his credibility both at home and abroad by confi rming a
25% reduction in German emissions by 2005. These efforts, together with the successful
work of the German Foreign Offi ce, were rewarded with the moving of the Permanent
Secretariat of the United Nations Framework Convention on Climate Change from Geneva
to Bonn, which marked the birth of Bonn’s UN campus.
Jürgen Trittin’s Green climate diplomacy was marked by the crisis following the collapse
of the negotiations in 2000, the subsequent operation at Marrakech to rescue the
Kyoto Protocol at the end of 2001, and the latter’s successful entry into force in late 2004.
Finally, in 2005 Sigmar Gabriel became the fi rst Social Democrat to head the environment
ministry, thus assuming overall responsibility for climate negotiations. The big test for Sigmar
Gabriel will come from 2008 onwards, in the negotiations that will be initiated in Bali
(Indonesia) on a mandate for the regulations of the Kyoto Protocol “post-2012”. In these
negotiations, which are expected to last at least two years, diplomacy, tactical skill and a
certain chutzpah will be very important for success. It is also important that the national
basis for a successful foreign policy relating to climate change should be retained, as a credible
climate policy is needed at home if it is to be advocated convincingly abroad.
Thus Germany has always played a vital role in the international negotiations on
climate protection, since all national governments have regarded environmental protection
as an integral part of foreign policy. This is only logical, as it is a traditional aim of
governments in conducting foreign policy to take preventive measures to protect their
own population (and now, increasingly, that of Europe) against hazards originating from
outside their own territory. In addition to traditional threats, such as military attack or
economic blackmail, the range of possible threats caused by the onset of climate change
has had another important danger added to it. This cannot fail to affect even a state in the
centre of Europe with a relatively short coastline – especially if German foreign policy is
increasingly defi ned in European terms.
513

Finally, climate change is going to hit our partners in the southern hemisphere hard.
It is a good tradition of German foreign policy to take an active interest in the well-being
of our partners. If the effects of climate change can ultimately ruin all our successes
in development co-operation – to quote the almost prophetic words of the minister of
development aid, Heidemarie Wieczorek-Zeul – this cannot fail to infl uence our foreign
policy. In view of the urgent need to act on the basis of new scientifi c fi ndings in climate
research the importance of an ecological foreign policy will continue to increase.
514
III. CLIMATE POLICY SCENARIOS FOR THE PERIOD UP TO 2020
There follows a description of three possible scenarios 14 for the development of climate
policy in the period up to 2020. These scenarios are of necessity somewhat simplistic, as
each represents a typical development with its basic characteristics. The background to
all the scenarios is a strong pressure to act, as the IPCC yet again confi rmed only recently.
In the next 15 to 20 years we will have to work very effi ciently to put the world back onto a
reasonably secure climate course. If the sensitivity of the climate system is 3°C or higher,
as the IPCC has just established, the global concentration of greenhouse gases must peak
at a level that is not much higher than 450 ppm CO 2eq . 15
III.1 The business-as-usual scenario: Nothing gets done
Although most governments have heard the warnings of looming climate change
and understand that not much time remains to act, the international negotiations on
the continuation of the Kyoto Protocol after 2012 end in failure. In certain industrialized
countries there are initiatives for a change of policy, and even China strives to use energy
more effi ciently and expand the share of renewables. But the urge to combat climate
change effectively remains limited, because companies’ short-term profi t considerations
outweigh the longer-term perspective; because governments lack the courage to take on
these companies with short-term interests; and because the populations of most countries
in the rich northern hemisphere are far too lethargic to actively change their living
and consumption patterns. In the newly industrialized countries, fossil-fuelled economic
growth proceeds apace with undiminished vigour, as the assumption that social stability
can be assured through the distribution of affl uence is given priority over longer-term
ecological (and hence also economic) stability.
But the negotiations are also doomed by the fact that the governments’ bunker
mentality prevents them meeting one another half way. The trend observed in the talks
on a negotiating mandate at the Meeting of the Parties in 2006 in Nairobi (see above)
continues unchanged. Although the European Union and a few friendly industrialized
countries are prepared to adopt further measures in principle, they expect conces-
14 These narrative scenarios are, however, supported by scenarios calculated by the IPCC, cf.
http://www.ipcc.ch. A very good example of narrative scenarios is provided by the Global Scenario
Group http://www.tellus.org/seib/publications/Great_Transitions.pdf.
15 See Meinshausen, Malte: What Does a 2°C Target Mean for Greenhouse Gas Concentrations?
A Brief Analysis Based on Multi-Gas Emission Pathways and Several Climate Sensitivity
Uncertainty Estimates. In: H-J. Schellnhuber et al. (eds.): Avoiding Dangerous Climate Change.
Cambridge University Press, 2006.

sions from the developing countries in return. On the other hand, the countries of
the southern hemisphere argue that it is hardly up to them, as they have to think fi rst
and foremost of their economic development; moreover, what they have received from
the industrialized countries hitherto can only be described as pathetic. The new US
government elected in late 2008 shows no interest in climate protection, continues
to reject the Kyoto Protocol and torpedoes any possibility of agreement by luring the
newly industrialized countries with offers of technology transfer and co-operation. But
the hopes of the newly industrialized countries for new technologies are dashed. Confi
dence in the good faith of the industrialized countries dwindles as North and South
withdraw into their bunkers.
The negotiations are protracted so that no agreement can be reached by the end of
2009, and even after that date climate diplomacy fails to extricate itself from the blind
alley it has worked itself into. Negotiations on an interim solution, such as prolonging
the existing pledges until a new treaty can be negotiated, peter out. As a result
the emerging markets for carbon (emissions trading, etc.) collapse in 2011 for lack of
prospects. The European Union falls far behind with its targets, and the EU’s internal
system of emissions trading among companies breaks down because the individual
governments grant their companies too many emission rights and fail to see to their
fulfi lment. As a result the EU fails to meet the target it set itself in early 2007 of a 20%
reduction of its emissions by 2020.
On the climate issue public opinion reverts, as it did after the warnings in the 1970s
and 1980s, to a wait-and-see attitude. Climate change is played down, while many people
want “to enjoy life to the full again”. Companies put their faith in coal, gasifi cation of coal
and a promise to store carbon dioxide in underground containers. They block efforts to
separate power generation from power supply and to decentralize the latter. Although
the share of renewable sources of energy rises, the reduced emissions are cancelled out
by increased consumption.
The upshot is that emissions continue to increase unabated with no end in sight,
so that the barely tolerable upper limit for the concentration of greenhouse gases (450
ppm CO 2eq ) will be exceeded by 2020, by which time it will be too late to turn back. Also,
keeping climate change below a global mean of three degrees Celsius would require such
drastic cutbacks that any government trying to impose them would be swept away by
popular wrath. Hurried investments are made in gigantic projects to sequester carbon
dioxide, huge areas are afforested, gas is pumped into underground storage sites, and
billions of little mirrors are shot into space to refl ect the sunlight. But the constantly
increasing climate change destroys the afforested areas, the underground sites cannot
retain the carbon dioxide, and the mirrors fall to earth, their mission unaccomplished.
Every country is out to salvage as much as possible for itself.
The world is on a climate course that will lead to a rise in the global mean temperature
of up to 4.5°C by 2100 or perhaps even more. 16 This earth is, in the words of NASA
scientist James Hansen, a different earth – the difference in mean temperature between
the last Ice Age and today is only about 5°C.
16 See Meinshausen, Malte: What Does a 2°C Target Mean for Greenhouse Gas Concentrations?
A Brief Analysis Based on Multi-Gas Emission Pathways and Several Climate Sensitivity
Uncertainty Estimates. In: H-J. Schellnhuber et al. (eds.): Avoiding Dangerous Climate Change.
Cambridge University Press, 2006.
515

III.2 The structurally conservative scenario: Something is done, but too little, too late,
and it is the wrong thing anyway
The international negotiations on the continuation of the Kyoto Protocol are successful,
but only a minimum consensus is reached. Following extremely arduous negotiations
an agreement is achieved in 2011. These talks are marked by a persistence of the bunker
mentality (see above), which causes the industrialized countries, on the one hand, and
the developing or newly industrialized countries, on the other, to eye each other on the
principle of “Whoever moves fi rst is dead”. They never get beyond petty disputes about
who is to blame for climate change – the industrialized countries because of their rigid
adherence to established emission rights, and the developing and newly industrialized
countries because of their relentless copying of the Western development model.
The reason for this failure is the structurally conservative basis of this scenario, which
is the desire – mainly on the part of the energy industry – to avoid any change in the underlying
principles and structures of the international economic order in tackling climate
change.
On the one hand, many companies, not only in Britain, now have climate change “on
their radar screens”. The dominant topic at the so-called “World Economic Summit” in
Davos in January 2007 was climate change and the opportunities it represented. In both
Europe and the U.S. – especially since the Stern Review – more and more initiatives are
being taken by companies which see climate change as a threat to their future. In early
2007, the Climate Action Partnership (USCAP, http://www.us-cap.org) was founded in
the U.S., to which fi rms like General Electrics, DuPont and Caterpillar belong. At the beginning
of 2007 the Swedish power company Vattenfall launched an initiative known as
“3C” (Combat Climate Change, www.combatclimatechange.org), which was soon joined
by almost 40 major European companies, including E.on and EnBW, Vattenfall’s competitors
in Germany. The 3C initiative set itself the express aim of infl uencing the global
distribution of emission rights and the negotiations for the period after 2012.
On the other hand, however, there is no intention of bringing about a real change.
An indicator of the structurally conservative thrust of the corporate climate protectors is
a plan presented by Vattenfall in early 2006 for a global distribution of emission rights
(http://www. vattenfall.com/www/ccc/ccc/index.jsp). The distribution described in this
plan is based on a principle that stabilizes the existing situation: the number of emission
rights each state is to receive depends on that state’s share of global GDP at a certain
time. Although the plan is ecologically correct enough to reward those states which in
the past have been particularly effi cient in managing their resources and thus have a good
ratio between energy input and economic output, at the social level, however, it penalizes
those who have been left behind in the race for economic development: it only gives to
the haves.
Thus the sheer scale of the structural changes causes both companies and governments
in the industrialized countries to recoil from them. The mantra of eternal economic
growth is left intact. Indeed, economic growth continues to be regarded as a precondition
of climate protection for both industrialized and developing countries. 17 Naturally, the
conditions to be preserved are those which constitute an important basis for company
17 Cf. e.g. the conclusions of the Chair of the Ministerial Gleneagles Meetings (3-4 October
2006, Monterrey), www.defra.gov.uk/environment/climatechange/internat/pdf/chairs-conclusions-mexico-october06.pdf.
516

profi ts. In Germany, for example, these are the old and centrally organized power networks
owned and controlled by the power utilities, which are not adapted to the challenges
of a decentralized energy supply system based on renewable sources of energy.
According to various analyses, between 26 and 40 coal-fi red power stations have been
planned in Germany in 2007, although this is clearly at odds with the climate-protection
targets. This adherence to a centralized, fossil-based energy supply is also reinforced by
the international development banks, as exemplifi ed by the World Bank in its Energy
Investment Framework of 2007. 18 The drive towards coal-fi red power stations thus continues
unabated. Since the beginning of the new millennium two new power stations have
been built every week, with over 1 billion tonnes of CO 2 emissions every year, and the
trend is accelerating. In the years 2008-2012 enough coal-fi red power stations are built to
generate an additional 12 billion tonnes of CO 2 emissions every year. 19
The overexploitation of resources continues without restraint until the oil and gas reserves
are squeezed dry. The adherence to old structures of energy supply means that policy
is mainly directed towards fi nding alternatives to oil. Oil is scarce and getting expensive.
Yet the alternatives to oil are not necessarily climate-friendly. When coal is turned into
gas, for example, to be used as a fuel for cars, the consequences for the climate balance are
twice as bad as when oil is burned. In Canada oil sand is exploited by means of a process
in which the oil must fi rst be washed with a very high expenditure of energy and of water
– a catastrophe for both the climate and the ecology of the region, as the extraction process
leaves behind veritable lunar landscapes. Finally, attempts are made to satisfy humanity’s
growing energy requirements by exploiting the huge reserves of methane hydrates located
in the permafrost of the Arctic region and under the ocean fl oor.
Thus, in the structurally conservative scenario, support is mostly given to the main
traditional technologies: nuclear power (although it can at best cover only a small percentage
of the world’s energy requirements); coal (with the uncertain promise of nonharmful
combustion, as the climate gases are to be sequestered underground); hi-tech
bioenergy (although it soon becomes clear that there will be a worldwide scramble for
arable land between foodstuffs and energy crops, which has already – in 2007 – led to a
“tortilla crisis” in Mexico, for example); and large-scale water power (although the latter
has pronounced side effects and its reliability is steadily dwindling as a result of the effects
of climate change on precipitation).
There is no move towards decisive improvements in the effi cient use of energy or of
renewable sources of energy. Although wind power soon becomes a marketable commodity
in countries such as Germany, Spain and India, the old industrial interests manage to
get their way. As a result the promotion of renewable sources of energy – by introducing
feed-in legislation, for example – makes no headway and the next phase of the boom is
missed. And yet in the space of a few years – between 1998 and 2006 – wind power in
Germany had attained a six percent share of the power generation market. But none of
this makes any difference – the structurally conservative forces of the “business as usual”
school are stronger.
18 See http://www.worldbank.org/energy; cf. How the World Bank’s Energy Framework Sells
the Climate and Poor People Short. A Civil Society Response to the World Bank’s Investment
Framework for Clean Energy and Development, September 2006, http://www.seen.org/PDFs/Energy_Framework_CSO.pdf).
19 Projection in Christian Science Monitor of 22 March 2007 – http://www.csmonitor.
com/2007/0322/p01s04-wogi.html.
517

On the international level there are initial signs of a relaxation in relations between
industrialized and developing countries, as the negotiations within the framework of the
G8+5 and the Gleneagles process lead to unusually brisk communication. But it soon
becomes clear that the rich countries of the northern hemisphere are not really considering
a restriction of their economic activities. They show no readiness to limit their own
emission of greenhouse gases in order to give the newly industrialized countries some
scope for growth.
The international climate negotiations within the framework of the Climate Convention
and the Kyoto Protocol therefore make no real progress. In 2011, an agreement on
a further pledge period after 2012 is reached, but the package is not adequate to the
problem. The U.S. is not part of this agreement, while the other industrialized countries
pledge themselves to a total reduction of eight percent in relation to the year 1990 (albeit
by making generous allowance for the avoidance of emissions in the forest sector) and
the developing countries undertake voluntarily (but in a vague manner) to promote renewable
sources of energy and make more effi cient use of energy. The gap that appears
between the pledges is fi lled by an interim agreement. But the confi dence of the markets
is shaken and emissions trading is no longer taken seriously. Many citizens’ initiatives
advocating a different way of life emerge, but most of the global economy does not become
much more effi cient.
When the amended version of the Kyoto Protocol fi nally comes into force in 2016, the
world is on a course which could bring about a rise in the global mean temperature of up
to 4°C by the end of the century. Whether the turnaround in global emissions will really
succeed is uncertain. The old interests are too strong, the alternatives too weak, and the
temptation to use imperialist power policy to secure energy requirements too great. A
relapse into the fi rst scenario is not unlikely.
518
III.3 The ecologically equitable scenario: fair and effective action is taken
The international climate negotiations for a follow-up agreement to the Kyoto Protocol
after 2012 are completed by the end of 2009. The discussions are marked by the customary
bitter diplomatic disputes, but these are kept under control. The trust between
industrialized and developing countries built up by the G8 and Gleneagles processes
does a lot to help. The participating governments do not yield to business pressure for a
structurally conservative solution, but use the impetus provided by corporate initiatives
to achieve basic agreement on the main points of a post-2012 strategy. This agreement
contains not only greater reduction targets for industrialized countries, but also elements
of confi dence-building for the developing countries.
Following the example of the EU, which in March 2007 committed itself unilaterally
to a 20 percent reduction of its emissions by 2020, Japan, Canada and a few smaller countries
are also willing to make further-reaching pledges. Admittedly, they do not pledge
as much as 20 percent, but the European pledges are also lower in real terms, as the
EU has in the meantime grown from 15 to 27 members and the East European states
have contributed the reductions they achieved after 1990. 20 But the Europeans succeed in
persuading their partners of the solidity of the targets adopted – and top this by raising
20 Cf. Luhmann, Hans-Jochen/Sterk, Wolfgang: Klimaschutzziel für Deutschland. Kurzstudie
für Greenpeace Deutschland, Energiebereich. Hamburg: Greenpeace, February 2007. http://www.
greenpeace.de/fi leadmin/gpd/user_upload/themen/klima/Klimaschutzziel-40Prozent_01.pdf.

their pledge to 27 percent. In return the partners pledge reductions averaging 10 percent.
Although even these targets do not go far enough to steer climate development onto a
safe trajectory, a clause is inserted to the effect that the appropriateness of the pledges
has to be examined immediately after their entry into force and new negotiations begin
on more ambitious pledges.
The U.S. cannot make any pledge under the Kyoto Protocol because the new government
only takes offi ce at the beginning of 2009. The new administration takes climate
change seriously, using the climate protection measures introduced by many states and
the changed mood in Congress to initiate a far-reaching national climate policy aimed
at reducing emissions to their 1990 level by 2020. This strategy is “non-partisan” – i.e.
supported by the two main parties – and is basically aimed at introducing an emissions
trading system for companies on the EU model and a massive promotion of renewable
sources of energy. In late 2009, at the climate summit concluding the post-2012 negotiations,
the U.S. puts this national commitment on the table and simultaneously issues a
legally binding unilateral declaration that it will abide by the commitment in its international
dealings.
This legally binding declaration is accepted by the other governments and declared to
be part of the negotiating package. The major newly industrialized countries, in particular,
abandon their distrust of the U.S. and declare that a vital condition for a constructive
joint policy has been met. There is another condition that is much harder to satisfy. The
states of the southern hemisphere expect generous fi nancing to fund their own climatic
measures and to cover part of the costs for the necessary adaptation to climate change.
Traditionally, the rich nations of the northern hemisphere are reluctant to make fi nancial
transfers to the southern hemisphere, suspecting that the money will be pocketed by the
elites in the recipient countries.
Previous practice has shown that it is only in cases of extreme danger – such as the
need to protect the ozone layer – that any substantial sums are provided. Within the
framework of the 1987 Montreal Protocol a special fund was set up to cover the “incremental”
costs of measures to protect the ozone layer, i.e. the additional costs incurred
by the need to use non-ozone-depleting substances (http://www.multilateralfund.org/).
More than two billion dollars have fl own from north to south via this channel. The fi nancial
requirements for abandoning the path of fossil-fuelled development will naturally
be a multiple of this. Yet the dangers of climate change are similar or even greater than
the depletion of ozone. It is therefore decided in the post-2012 negotiations to set up
a similar fund based on the existing funds of the Framework Climate Convention and
the Kyoto Protocol. Another fund is set up to cover the costs of adaptation. This fund is
partly fi nanced by the proceeds from the auctioning of emission certifi cates in Europe
and elsewhere. A global system of emissions trading with part of the proceeds being used
to reimburse the public is agreed as a long-range target for the period after 2020. 21
In return, the major newly industrialized countries indicate their willingness to undertake
commitments to limit their own emissions. These targets are not yet “quantitative”
like those of the industrialized countries – they do not set fi xed upper limits for
emissions, as it is too early for that. But for certain sectors (e.g. steel, power generation,
etc.) clearly defi ned measures are agreed to reduce emissions. It is also agreed that by
the year 2020 at least 30 percent of the power generated must be accounted for by re-
21 Cf. e.g. Barnes, Peter: Capitalism 3.0. A Guide to Reclaiming the Commons. Berrett-Koehler
Publ. 2006.
519

newable sources of energy, a development to be partly fi nanced by the industrialized
countries. The agreement is supplemented by a number of technical chapters specifying
co-operation in the development and dissemination of climate-protecting technologies.
These obligations do not apply to all developing countries, just to the “newly industrialized
countries” which have reached a certain stage in their economic development. This
threshold is calculated on the basis of a complex index, which measures historical responsibility,
economic power and countries’ potential for reductions. 22 The poorest states
(least developed countries) have no reduction commitments, but receive aid in the form
of electrifi cation using renewable sources of energy and adaptation to climate change.
In view of the rapid completion of the climate negotiations by the end of 2009 market
confi dence in emissions trading and the direction of climate policy is maintained. The
ratifi cation of the Kyoto 2 Agreement drags on longer than expected, but the existing
pledges are renewed for a transitional period (after 2012). In mid-2014, Kyoto 2 enters
into force. Even before this, however, negotiations have begun on a tightening-up of the
protocol – this time with the U.S. The Europeans succeed in convincing the Americans of
the necessity of a long-term target for global emissions. The long-term target adopted for
the industrialized countries is a (not strictly binding) reduction of greenhouse gas emissions
amounting to 80 percent by 2050, as a fi rst step towards a global reduction of 50
percent by the middle of the century. This can serve as a basis for a rational, negotiated
strategy for the global distribution of emission rights.
Not only in Europe and Japan, but also in the U.S. the stage is being set for a solar
economy. The leading position enjoyed by American wind and solar companies 20
years earlier is quickly restored. After the right economic framework has been created,
the U.S. experiences an unprecedented boom in renewable sources of energy. As in the
years 2007/2008, when billion-dollar investments ushered in a competition over bioenergy,
capital is combing the whole range of solar sources of energy for investments. Even
Exxon, previously a “fossil” among the oil multinationals and notorious for fi nancing
counter-studies against climate change, recognizes the signs of the times and sets up a
renewables division. The outlook is that Exxon will remain the world’s biggest company
even in the solar age.
Naturally, the measures do not take effect as quickly as expected. In China and India
especially, emissions continue to rise for quite a while, largely as a result of these countries’
intensive use of coal. Furthermore, the technology of sequestering CO 2 in deep rock
shafts and old gas fi elds (carbon capture and storage, CCS) does not live up to expectations.
Apart from individual cases, the companies cannot guarantee that the climate
gases will remain in the earth. Civic action groups are founded to oppose the storage of
compressed carbon dioxide in populated areas, as a deadly hazard is feared if the gas
leaks out. Many citizens’ initiatives are also directed against coal-fi red power stations, as
happened in 2006 when a new coal-fi red power station was planned for Mainz (http://
www.kohlefreies-mainz.de). In most European countries a moratorium on new coal-fi red
power stations without sequestration is adopted at the beginning of the second decade,
followed by the U.S. and Canada around 2015 and China in 2020. To cover possible gaps
22 Cf. Ott, H.E./Winkler, H./Brouns, B./Kartha, S./Mace, M.J./Huq, S./Kameyama, Y./Sari,
A.P./Pan, J./Sokona, Y./Bhandari, P.M./Kassenberg, A./La Rovere, E.L./Rahman, A.: South-North
Dialogue on Equity in the Greenhouse. A proposal for an adequate and equitable global climate
agreement, GTZ Climate Protection Programme, May 2004, (http://www.wupperinst.org/uploads/
tx_wiprojekt/1085_proposal.pdf).
520

in the energy supply, gigantic wind parks are set up with the aid of billionaire investors.
As in the rest of the world, the power grid in China is geared to decentralized transmission
with a high sequestration capacity. The previously overheated economic growth
eases off and there are fewer social inequalities.
In the ecologically equitable scenario, too, the concentration of greenhouse gases
in the atmosphere exceeds the magic limit of 450 ppm CO 2eq , which offers only a 50%
chance of keeping the warming rate below a global mean of 2°C. For a short while the
concentration will even soar to up to 475 ppm CO 2eq , only to fall continuously thereafter,
at fi rst slowly but then with growing speed. In view of the sluggishness of climate
systems, which in this case turns out to be an advantage, there is still a chance of global
warming staying below 2°C. This earth will be different from the one we have known
so far. Great efforts must be undertaken to adjust to the altered circumstances and it is
also necessary to resettle parts of the population of coastal regions – yet a catastrophic
development could still be averted.
IV. RECOMMENDED COURSES OF ACTION FOR GERMAN CLIMATE DIPLOMACY
In view of the looming crisis of resources, the ecological crisis will irrevocably alter
the coordinates of foreign policy. As Willy Brandt once said, using a phrase coined by
Carl Friedrich von Weizsäcker, all foreign policy will in future be nothing less than global
public policy (“Weltinnenpolitik”). For just as the economic autonomy of nations is
increasingly restricted by ever closer economic ties, the ecological challenges are erasing
the dividing line between “internal” and “external”: crises affecting our environment and
resources give rise to trans-national risk chains, which in turn are fed by trans-national
cause-and-effect chains. 23
The resulting confl icts will only be successfully avoided or resolved if foreign policy is
seen as biosphere policy. We can no longer think in “national” categories, as an international
climate policy without national reduction measures makes no sense. And “national
interest” properly understood, which naturally continues to be the guiding principle of
foreign policy, today embraces, via a large number of feedback and cascade mechanisms,
the well-being of all the people on the planet. In this sense the main frame of reference of
foreign policy is no longer the national interest, but the global common good. An ecologically
oriented policy will, therefore, also have to be concerned with settling international
social confl icts.
The very fi rst thing that is required is a credible national climate policy. Only if domestic
and foreign policy are seen as a unity can either of them be successful. This is a
new quality – both for foreign and domestic policy. Those who wish to pursue deterrence
in the fi eld of security policy must see to it that the military means have been provided at
home. Those who want to convince others that climate policy is of existential importance
must give this issue priority at home. This is, therefore, the fi rst confi dence-building
measure.
23 Sachs, Wolfgang/Ott, Hermann E.: Öljunkies auf Entzug! Umweltpolitik ist Ressourcenpolitik
ist Sicherheitspolitik. Neue Herausforderungen für die Außenpolitik. In: Internationale Politik, Volume
62, 2/2007, pp. 6-15. English edition: Sachs, Wolfgang / Ott, Hermann E.: A New Foreign Policy
Agenda. Environmental Politics is Resource Politics is Peace Politics. In: Internationale Politik, Journal
of the German Council on Foreign Relations (IP-Global Edition), Vol. 8, 1/2007, pp. 16-22.
521

This limitation also provides space for the development of the southern hemisphere.
For the international climate negotiations – this is the second confi dence-building measure
– will only be successful if the rich countries of the northern hemisphere are willing
to share with others. This means that the established industrialized nations must create
some space for others to grow as well. For governments this means not yielding to the
energy industry’s demands for “business as usual”. In any case, the developing countries
no longer have much room to grow, as too much time has been wasted already. But there
is also a matter of principle at stake here. And the negotiating clout of the newly industrialized
countries is considerable. Basically, they only need to carry on as they have done
in the past to trigger a catastrophic development. The fact that they will be harder hit by
climate change than the North will not necessarily induce the elites in these countries
to change their minds, as they give precedence to socio-economic stability in the short
to medium-term. The EU’s offer of a unilateral 20% reduction in emissions marked the
beginning of a confi dence-building measure. If it really wants to play a pioneering role,
however, it would need to raise that offer to 30% – which is possible, even without nuclear
energy, as the Wuppertal Institute for Climate, Environment and Energy has shown
in a report for the WWF. 24
Because the negotiating clout of China, India and Brazil is so great, the North – third
point – will not be able to avoid fi nancing, at least partially, the climate protection measures
in these states. These incremental costs will not be astronomically high, but they
will be perceptible. In Sir Nicholas Stern’s report the incremental costs, i.e. the additional
costs of switching to low-carbon technologies in developing countries, are estimated at
20 to 30 billion US dollars a year at the minimum – and this is probably a low estimate. 25
Nevertheless, some of the funds expended – as in the case of development aid – fl ow
back to their point of origin, which happens when technologies and know-how are purchased
in Germany and Europe. The question is how long it will take for this insight to
become obvious and be included in the negotiations – and also whether it will be realized
early enough to avoid any excessive strain being put on the relations between old
and new industrialized countries. It is not a matter of naively dispensing hand-outs in
all directions. Rather, the rich countries must make clear their own priorities for climate
protection and present an offer that the southern hemisphere can accept and adopt. The
offer to share the costs of reduction measures in developing countries would send out a
strong signal.
Fourthly and fi nally, the readiness to share must extend to the adaptation to a climate
change that is no longer avoidable. The record of the industrialized countries in this
respect is less than impressive – the money they gave was too little too late. What is to
be done with 100 million people in Bangladesh when the tides rise? What is to be done
with the people on the fl at islands of the Pacifi c, who like the inhabitants of Tuvalu have
already applied for asylum in Australia and New Zealand? How are we to react to the
threat of global famine, if the climate goes haywire? The assurance of dependable and
adequate fi nancing for adaptive measures would be the fourth confi dence-building measure,
without which no progress will be possible.
24 WWF: Target 2020. Policies and measures to reduce greenhouse gas emissions in the EU,
October 2005. A report by the Wuppertal Institute, www.panda.org/climate/EUtarget2020.
25 Stern, Nicholas: The Economics of Climate Change. The Stern Review. Cambridge University
Press, 2007, p. 491ff, www.hm-treasury.gov. uk/independent_reviews/stern_review_economics_climate_change/sternreview_index.cfm.
522

In conclusion, the starting point for Germany’s foreign climate policy is excellent.
It can build on its sound balance of the past 20 years, it has the European Union as a
booster and sounding board, and the population is behind it. The ministers for environment,
economic co-operation, foreign affairs and fi nance would have the opportunity
of devising a cogent and coherent “global public policy” (“Weltinnenpolitik”). Whoever
seizes this opportunity will earn the gratitude of Germany, Europe and the world.
On the author: Hermann E. Ott was Director of the Wuppertal Institute’s Climate Policy Division until the
end of 2003 and has headed its Berlin offi ce since 2004.
523

SLOVENIA

Bogomil Ferfi la and Paul Phillips
Slovenian Economic
and Political Development

CHAPTER 1
THE ECONOMIC DEVELOPMENT
OF SLOVENIA:
BEFORE THE NATION STATE
(6 TH CENTURY B 1991)
THE ECONOMIC DEVELOPMENT OF SLOVENIA BEFORE 1918
As an independent sovereign state, Slovenia=s history has been very short B only
eleven years. This is not to deny the existence of a Slovenian cultural nationality in the
Balkans since Slovenes fi rst arrived in the region in the 6 th century; but to make the point
that before 1991, the Slovenian peoples had always been part of larger political entities.
After 748, the Slovenian areas were part of the Holy Roman Empire. In the 10 th and 11 th
centuries they were organized in three separate counties or duchies Aheld by various
families and ecclesiastical princes; their boundaries and their allegiance, changed from
time to time.... [Darby et al (1966) p. 14]@
The late pre-modern period began in 1278-1335 when fi rst Styria and then the dominantly
Slovene provinces of Carinthia and Carniola were incorporated into the Habsburg
domain. Later in the century, Istria and Trieste were added to the developing German-
Austrian Habsburg empire centred on Vienna. The control of the Slovene lands by Austria
was to continue for six centuries, until 1918. The Reformation brought a Protestant-independence
movement to the Slovene region in the 16 th century but that was suppressed
by an Austrian-Catholic counterrevolution and persecution that eventually extinguished
the Protestant movement. However, the Reformation had planted an enduring seed. It
served Anot only to revive Slovene language and literature, but also to stimulate Slovene
self-consciousness which was to fl ower into a national movement some three and a half
centuries later [Darby et al (1966) p. 16].@
In the second half of the 18 th century, during the reigns of the Habsburg monarchs,
Maria Theresa and Joseph II, the provinces and estates lost a considerable degree of their
medieval autonomy with the strengthening of the Austrian state and, as a result, a considerable
>Germanizing= of the realm took place. Still, the Slovene language was retained
and strengthened in the schools. More to the point here, the beginnings of modern economic
development were appearing following the mercantilist and physiocratic policies
of Maria Theresa and Joseph. The main effect was to begin the reform of agriculture by
the strengthening of the powers of the state at the expense of the feudal estates. The
provinces gained taxing powers and the power of the lords were gradually reduced as
the transition from feudal land tenure to individual private ownership took place. The
emancipation of the serfs was begun though it took three quarters of a century to be completed.
Other developments that took place during this period were monetary reform
and the draining of the large moor area south of Ljubljana.
Despite some limited craft (industrial) development in industries such as linen and
silk and the decline of medieval guild regulation after 1770, agriculture remained the
529

ase of the economy. An agriculture school was established in Carniola in 1771, agricultural
societies founded, and cultivation of maize and potatoes, crop rotation and >barn
farming= was begun, all with active state encouragement [Fischer (1999) pp. 15-19]. A
>national= market was emerging, in part due to the elimination of internal tolls along with
strong imperial protection, but in the Slovene areas, restricted by limited transportation
systems and a rugged terrain, non-agricultural production remained heavily dependent
on rural crafts which accounted for an estimated one third of non-agricultural output. As
Fischer notes, until the 1820s, Athe terms trades, handicrafts, putting-out system, manufacture,
independent workshop and even factory were highly interchangeable [Fischer
(1999) p. 25],@ though there was considerable iron and steel production at the time in
Carinthia and Carniola. He estimates that around 1765 in the Slovene territories (including
Prekmurje and Trieste) there were approximately 4,500 commercial craftsmen in 49
>professions=, but that probably does not include most non-commercial, local craftsmen.
As the century proceeded, the putting-out system of the rural and urban merchants expanded
though actual industrial production was quite limited to a few sectors led by
textiles and glass.
The liberalization and reform of the feudal system was very partial and still incomplete
when Napoleon invaded Austria and seized control of a good part of Slovene territory
including Carniola and western Carinthia and Istria and other parts of Croatia and
Dalmatia, creating the new province of Illyria with its capital in Ljubljana. French rule
respected the linguistic and culture integrity of Slovenians and, despite the briefness of
French control, furthered economic development through the building of roads, creation
of a postal system, reorganizing the administrative system incorporating the Napoleonic
Code, and promoting trade.
French rule, however was short lived, from 1809 to 1813, and the Slovenian territories
was returned to the Austrian empire. Political liberalization stopped and German infl uence
again increased. Slovenians were once again united in a single state, but Ain neither
the political nor the economic sense did Slovenian territory project any self-awareness
as a single area or community. Political and economic integration did not come to the
Slovenes until the middle of the 19 th Century.... [Fischer (1999) p. 32]@
Nevertheless, it was after the defeat of Napoleon and the end of the Continental
blockade, that industrialization of the region really began, fi rst in textiles, sugar and iron
factories followed by other industries and the expansion of the putting out system. By
1847 there were 25 steam engines in the Slovenian territories [Fischer (1999) p. 47]. But
full integration in the national economy did not occur until after the 1848 revolution and
the complete abolition of the feudal land tenure system and of the controls and privileges
on manufacturing inherited from the guild era. The conversion of land tenure and common
pasture and forest lands to individual ownership by former serfs and domain owners,
however, produced its own problems and created a fragmented agriculture marked
by extremes of size differentiation and heavy debt obligations by many of the small farmers.
In 1896 only 20 per cent of Slovene territory was suitable for cultivation and a further
third was grassland or pasture. The remainder was mainly forest. Most of the farms were
small family units, with almost sixty per cent being less than 5 hectares. Large farms over
fi fty hectares comprised only 1 per cent. [Fischer (1999) pp. 36-37]
The small size and indebtedness of farmers and their increased dependence on the
market led to intense problems of poverty and the resulting migration of population
out of agriculture and out of the region Aon a scale matched in Europe only in Ireland
530

[Fischer (1999) p. 63].@ It is estimated that between 13 and 23 per cent of the population
emigrated from the region in the decades preceding the 1 st World War. Despite the ruralurban
migration, however, the urban population within the region remained small. Using
the standard of an urban centre of 2,000 or greater, the urban population increased from
only 4 per cent at mid-century to just 13 per cent by the War. (Using a 1,000 population
measure, the rise was from 6 per cent to 16 per cent.) Though almost seventy per cent of
the population was classed as rural, agriculture generated just sixty per cent of income
due to the low productivity of the small and undercapitalized farms which proved unable
to support farmers and their families. [Fischer (1999) pp. 37-38; 63]
Though agriculture was in a continuing crisis in the second half of the 19 th century,
industrialism made important advances spurred on by the development of the railway system.
The mainline between Vienna, through Ljubljana to Trieste was built in the period
1837-57 while the other mainlines making the backbone of the system and connecting
the Slovene provinces and with Croatia, Hungary and Austria were largely completed by
1890. In the following two decades the construction of regional and local lines added to the
network. The telegraph system accompanied the fi rst phase of railway building followed by
the telephone system in the 1880s.
Industrial development followed the two central lines of railway (Maribor-Trieste and
Ljubljana-Jesenice), though Maribor, Celje and Ljubljana did not emerge as major industrial
centres at the time but rather retained their dominance by small scale handicraft,
trades and artisanal production [Fischer (1999) p. 54]. Nevertheless, industrialization
continued apace led by resource intensive industries, iron and metal works, wood, furniture
and paper, textiles, tobacco and food industries. Including handicraft and smallbusiness
production (which accounted for half of these sectors) and construction, they
accounted for four-fi fths of non-agricultural employment in the decades before the 1 st
World War [Fischer (1999) p. 55].
A signifi cant part of this new industrialism, particularly the larger scale operations,
was directed not at the domestic local and provincial markets but rather to exports, though
the domestic market was still the primary market. In a survey taken by the Ljubljana
Chamber of Commerce in 1919 of the markets of Slovenian industrial fi rms (reported by
Fischer, pp. 56-58), over half the fi rms sold to the domestic market; but one third of the
companies in the survey exported to Europe while forty per cent of these fi rms also sold
to one or other of the other six continents. Thirteen per cent sold to eastern Europe while,
surprisingly, just 6 per cent exported to the region of which they were becoming part as
a result of the formation of the fi rst Yugoslavia in 1918.
What is interesting is that, prior to the formation of Yugoslavia, Slovenia=s primary
external economic orientation was to western Europe, as part of Europe=s semi-developed
economic periphery. The dependent status of the industrial development and the lack of a
Slovenian capitalist class is demonstrated by the source of investment funds, fully 85 per
cent or more of which are estimated to have come from foreign sources [Fischer (1999) p.
56]. In part this was due to the underdevelopment of fi nancial markets in the Slovenian
territories. Although Ljubljana was beginning to emerge as a fi nancial centre late in the 19 th
century, the banks were not allowed to invest in industrial undertakings but, in any case,
there were no signifi cant pools of Slovenian capital available at that time.
Summing up, Fischer characterizes the second half of the 19 th century Aas a time
when the focus of the national economy shifted from the agricultural to the non-agricultural
sector, towards industry, handicrafts and transport. And mining, especially of
531

coal, underwent the biggest expansion [Fischer (1999) pp. 48-9].@ But it would be wrong
to think of the Slovenian territories as industrialized on the eve of the 1 st World War.
Agriculture was still the dominant employment of the bulk of the population. Moreover
it remained its low productivity, small scale, undercapitalized, essentially subsistence,
peasant character, particularly in comparison with other agriculture within other parts
of the Austro-Hungarian Empire, in Germany or in northern Europe. The crisis of agriculture
and rural poverty was actually intensifi ed by the construction of the railways.
While the railways integrated the Slovenian area into a larger market, they replaced the
local road and river transportation systems that provided supplemental labour income
to farmers. At the same time, the towns that grew up along the railways usurped the
trade intermediation formerly provided by the rural population which was also forced
to orient production more and more to the urban markets in order to earn the money
necessary to pay for land, taxes and farm improvement investment. Furthermore, the
railways opened up local markets to competition from imported, foreign goods undermining
rural handicraft production in such pursuits as weaving, spinning, dyeing and
leather working. Though the farmers did come together in the last quarter of the century
to form marketing and fi nancial co-operatives (>credit unions=) which tempered the crisis
and contributed to rising productivity and crop yields, this was largely offset by the fall
in prices of major agricultural products to which the improved transportation system
contributed [Fischer (1999) 39].
There is no doubt that the Slovenian areas of Austria had begun an industrial transformation
during the previous half-century. The population in the area which today comprises
Slovenia was 1,312,100 in 1910, an increase of around a quarter over the previous
four decades. Employment in industry and handicrafts had increased by 84 per cent,
more that three times the rate of population growth. The proportion of the population
earning their living in artisanal and industrial pursuits doubled in the period but it was
still only 13 per cent of the population. The rural population still comprised 66 per cent
of the population and generated 60 per cent of national income. [Fischer (1999) pp. 62-
64] The transformation had really only just begun. This was the situation on the eve of
the >Great War.=
The War itself interrupted and set back economic development of the region. Even
before the actual confl ict began, the situation in the Balkans and economic conditions
around the world combined to produce a pre-war depression. It was only made worse
when hostilities broke out. As part of Austria, the Slovene provinces were assigned three
roles: providing men and materials for the armed forces, provisioning the army and contributing
to the fi nancing of the war. All three contributed to the region=s woes.
First, control of the economy was centralized in Vienna and a form of >planned economy=
was instituted with included redirection of production to the war effort and rationing.
Combined with labour shortages due to military recruitment, the redirection
of resources and industrial raw materials (coal and iron in particular) to industries and
fi rms directly tied to military production, led to a massive retrenchment in industrial production.
Almost 60 per cent of the fi rms which responded to a 1917 survey (many of the
smaller workshops did not), reported either that they ceased operations entirely or that
they reduced their output. Another approximately one tenth redirected their operations
entirely to military markets. [Fischer (1999) pp. 60-62]
Agriculture likewise suffered from lack of labour and shortages of draught animals,
shortages which were exacerbated by drought, which resulted in a fall of agricultural
532

output by one quarter to a half in all sectors of agriculture. The whole population were
beset by higher taxes to fi nance the war but the war but this was insuffi cient and resort
to printing money by Austria resulted, as in many other countries during the confl ict, in
high rates of infl ation.
Thus, the end of the war, the breakup of the Austro-Hungarian Empire, and the creation
of what was to become Yugoslavia, saw Slovenia as a region of the new pan-Slavic
federation with the essential elements of industrial infrastructure B energy, transportation
and communication systems, a fl edgling banking system, and a foundation of industrial
and craft industries B in some disrepair and disarray because of the war, but still
suffi cient to provide the foundations for further, and more rapid, industrial expansion
during the two decades of the fi rst Yugoslavia.
ECONOMIC DEVELOPMENT IN SLOVENIA
IN THE FIRST YUGOSLAVIA
The end of the war brought with it the end of Austria-Hungary and, in a wave of
pan-Slavic feeling, the formation of the new country of Yugoslavia (originally constituted
as the Kingdom of Serbs, Croats and Slovenes and not formally named Yugoslavia until
1929) encompassing most of the South Slavic areas of the former Austro-Hungarian
Empire and the Serbian areas including those liberated from Austria-Hungary and from
the Ottoman empire in the preceding century. The new country included just over a million
Slovenes who constituted just under a tenth of the total population though it must
be remembered that one third of Slovenes were outside of the boundaries of Yugoslavia
in areas claimed by Austria and Italy. Thus, Slovenes were a small minority in a country
where almost half the population were Serbs (including Montenegrins and Macedonians)
and another quarter Croats. [Darby et al. (1966) pp. 154-55, 165] The issue of whether
Yugoslavia was to be a federation or a centralized state was joined from the very start.
The constitution of the new state, adopted in 1921 under strong Serbian infl uence, however,
was highly centrist, a situation which was opposed by the Slovenes who favoured a
more federal structure and distribution of powers.
Despite the political battles that surrounded the adoption of the constitution, which
continued for two decades, and the problems left by the war and those posed by the diffi
culty of integrating disparate political-ethic groups from different systems into a functioning
national economy including the establishment of a new monetary system, the
economy recovered and expanded perhaps more rapidly than might have been expected.
Indeed, the 1920s proved to be boom years across the country. Nevertheless, the confl ict
between Serbia and the other two founding national groups over the issue of centralism
versus federalism continued leading in 1929 to a proposal to split up the new state.
However, any such move was precluded by the abolition of the 1921 constitution and the
usurpation of all powers by Serbian King Alexander in January 1929 producing a royal
dictatorship further reducing the infl uence of Slovenes in economic policy. It was at this
time that the offi cial name of the country became Yugoslavia.
A new constitution was proclaimed in 1931 and remained in effect until 1941. It included
a parliament but the dictatorial powers of the crown were retained [Darby et al.
(1966) p. 181]. The political discord and regional/ethnic discontents only intensifi ed as
the world-wide depression of the 1930s gripped Yugoslavia. AThe economic and social
533

problems which had their roots in the national and constitutional issues ... were now being
aggravated by world depression [Darby et al. (1966) p. 184].@
The depression hit with full force in 1931. Yugoslav exports fell by a quarter in the fi rst
six months and continued to fall as the depression deepened. A Dinar crisis ensued, further
exacerbated by the end of German reparation payments. Agricultural prices collapsed
and attempts to shore up grain prices by government purchase turned into a fi nancial and
storage disaster. Nor did nature co-operate with cold weather and fl oods in the winter and
spring of 1931-32 forcing a liquidation of a quarter of the country=s cattle, a major export
item. Businesses collapsed and bankruptcies soared while inept and pro-cyclical monetary
and tax policies only made things worse. Agriculture was in dire straits.
534
Something had to be done for the peasant, bedeviled by the collapse of the whole
economy, exasperated against the urban gospoda (gentry) who ruled and exploited
them, and unable to repay the debts which, especially in the Serbian districts, they
had contracted in the carefree years of prosperity. [Darby et al. (1966) p. 186].
The economy reach its trough in 1932 and began a slow crawl out of the depths of
depression, in part due to increasing economic and trade relations with Germany, particularly
after a commercial treaty was concluded between the two countries in 1934. This
was supplemented two years later by large increase in barter trade on terms favourable to
Yugoslavia. This increased trade with Germany compensated to some extent for the temporary
deterioration of trade relations with Italy but as the German-Italian Axis developed,
Yugoslavia=s trade relations with Italy quickly recovered. The good relations with Germany
accommodated Yugoslavia=s acquiescence to Germany=s conquest of Austria in 1939.
The issue of federalism and regional autonomy did not go away during the depression
and, after the 1935 election, a new proposal was put forward to create three Banovine
(provinces) in large part to placate the Croatian separatist movement. Nothing materialized
out of this until after the 1938 election when the central government was defeated. At
that time three provinces were created, include a Slovene Banovine but only the Croatian
Banovine was granted autonomous status and given additional legislative powers, except
those relating to foreign affairs, security and defense, commerce and transport [Darby et
al. (1966) p. 200].
Yugoslavia was caught between its growing economic relations with the imperialist
Axis nations and its tradition ties to its Balkan allies, in particular Greece, and its European
political supporters, France and Great Britain. Though offi cially neutral, the Serbian
regent, Prince Paul, sided with German appeasement but the Yugoslav people became
increasingly hostile to the Axis cause. On April 6, 1941 Germany and its Italian, Hungarian
and Bulgarian allies invaded, occupied and dismembered the fi rst Yugoslavia.
Slovenia=s economy largely followed the same pattern as the national one though it
was required to make greater adjustments to the new economic structure and suffered
from some of the national policies designed primarily for the benefi t of the larger Serbian
interests. In 1918, at the end of the war, the whole region was gripped with infl ation. At
the same time Slovenia and Croatia were required to give up the Austrian crown as their
currency and adopt the Serbian Dinar and exchange rate. Unfortunately for Slovenia, the
exchange conversion rate of the Dinar and the rampant infl ation was greatly disadvantages
for the Austrian Crown areas resulting in an expropriation of Slovenian fi nancial wealth. It
was not just the monetary system than had to be integrated with the rest of Yugoslavia but
also the fi nancial and banking system. The Slovene government >sequestered= (confi scated)

the assets of all companies suspected of evading Slovenian taxation or attempting to divert
profi ts abroad in order to protect against capital fl ight. However, the Slovenian legislation
was overridden by legislation in Belgrade that sequestered the property of enemy aliens but
which allowed fi rms to become >naturalized= by coming under majority Yugoslav ownership
[Lazarevic (1999) pp. 104-105]. For many Slovenian companies, the national law allowed
fi rms to be taken over by non-Slovene fi nancial intermediaries, many of which reverted to
foreign or non-Slovene ownership. Lazarevic writes:
Even contemporary observers noted with regret that the Slovenes were unprepared
and were unable to secure a majority share in the most important factories. This
was partly due to the failure to concentrate Slovenian fi nancial resources, which they
could have used to bring foreign-owned economic organisations under Slovenian national
control in a planned manner. Moreover, on frequent occasions a company that
had already been Anationalised@ was transferred a few years later back into the hands
of the original owners by being sold off, or because the Anationalisation@ itself had
merely been fi ctitious. [Lazarevic (1999) p. 105]
These were Slovenian grievances that fed into the dispute over regional jurisdiction
that remained unresolved through both Yugoslavias until independence in 1991. The fundamental
issues, however, were never far from the surface. Slovenia entered Yugoslavia
at a higher level of development than the other ethnic regions, particularly those in the
south that had been subjugated by the Ottoman empire. When Yugoslavia was formed,
Slovenia=s per capita income was some three times the level in the southern regions [[Lazarevic
(1999) pp. 106-7]. Relative to the Yugoslav average, Slovenia=s income was sixty
per cent higher in 1910, something the war did not likely change much. Furthermore,
Slovenia was much more industrialized, in part a result of its previous incorporation
within the Austro-European economic sphere.
The incorporation of Slovenia into the lesser developed Yugoslavia offered both opportunities
and restrictions, opportunities in that as the most developed, industrial region,
it had comparative advantages in the Yugoslav market; restrictions in that the Yugoslav
market was limited and national policy favoured the less developed regions. This
was manifest in the tariff and customs law. Serbian tariffs were extended to cover the
entire country, thus providing a high level of protection for domestic industry. Slovenia
had been accustomed to lower tariffs and more intense international competition. The
new tariff regime was a mixed blessing. It gave Slovene industry an advantage in the
new domestic Yugoslav market accelerating its market penetration, but it made Slovene
products increasingly less directed to, and competitive in, western European markets. In
aggregate, however, it gave Slovenia a major industrial boost because, as the most developed
of the regions of Yugoslavia, it made Slovenia the industrial centre of the new country
and it no longer had to compete with more developed regions of Austria. In short,
Abecause [the process] caused the disintegration of the old market and subsequently the
emergence of a new one, the quality of which was essentially different,@ Slovenia had a
comparative advantage [Lazarevic (1999) p. 106]:
For the Slovenian economy the customs tariffs and the system of low direct taxation
was an important structural change because until that time economic development had
take place in a climate of much strong competition where companies from the industrially
developed parts of Austria enjoyed an advantage. Now a broad market hungry
for a wide variety of goods, consumer goods in particular, was opened up to Slovenian
535

536
companies. The weakness of the competition from the poorly developed and non-industrialized
parts of Yugoslavia, the benefi ts of customs protection and the established
infrastructural conditions provided the Slovenian economy with a better starting position
in the new environment, and accelerated the development of industry (especially
manufacturing) and trade in Slovenia. [[Lazarevic (1999) p. 107]
On the other hand, for agriculture, still the dominant sector of the Slovene economy
employing two-thirds of the population, the crisis that predated the war continued and,
if anything, became more intense. Slovenian agriculture was faced with the loss of northern
markets while it had diffi culty in competing with new supplies from the south where
the amount of arable land and climate differences put Slovene farmers at a competitive
disadvantage. Moreover, Slovenia was also still dominated by ineffi cient, technologically
backward, small scale, family units that simply could not make a living in a market
economy. More than 60 per cent of farms remained too small scale to offer any hope of
a sustainable subsistence income. Farms below 5 hectares were considered not viable
meaning that the majority of farmers had to seek income sources outside of farming. The
only alternative was emigration which many resorted to. This was even before the crisis
intensifi ed with the depression in the fi rst half of the decade of the 1930s.
Despite the regional imbalances and the obvious feeling in Slovenia that it was being
held back by the policies of Belgrade directed at favouring the Serbian and souther
regions, economic growth and development in Slovenia in the decade following the 1 st
World War was impressive and it no doubt benefi tted from being the industrial engine
of the country. As Lazarevic characterizes the period, ASlovenia experienced a powerful
surge of industrialisation, which we can reasonably term Slovenia=s founding age [[Lazarevic
(1999) p. 112].@ In short, despite any perceived or real restraints on Slovenian enterprise
from Belgrade, the twenties were a period of real economic advance for the region.
Slovenian industry responded to the opening up of the new market. The number of
manufacturing facilities in all the major industries doubled on average over the decade
led by textile plants which increased ten-fold, though the majority of these were small, labour
intensive manufactories. Large scale operations still remained dominated by foreign
capital while Slovenian capital predominated in the small scale sector. By the 1930s total
Slovenian capital in the industrial sector outweighed foreign capital by a ratio of two to
one [Lazarevic (1999) p. 113]. Another indication of a growing Slovenian capitalist sector
was the expansion of Ljubljana as a banking and fi nancial sector. The number of banks
tripled to nine and stock and fi nancial markets developed. However, most capital for the
emerging manufacturing sector did not come from the fi nancial sector but rather from
individual savings and local credit co-operatives.
The depression which began in 1931 changed the economic landscape. Employment,
which had peaked in 1930 fell and unemployment rose until the economy began to recover
after 1935 but employment did not recover to earlier levels until the end of the decade.
Over the whole decade, the best that can be said is that it was a period of >consolidation=
though perhaps, more accurately, of stagnation.
Agriculture, which had remained in crisis during the twenties, was even further depressed
. The farm population continued to drop and over half of those who remained
could not make a subsistence living out of farming but had to take work in manufacturing,
mining or commercial activities just to subsist. Slovenian agriculture was also negatively
affected by national agricultural policies. Although a moratorium was introduced on farm
debt payments, the high grain price policy which preserved the prices for cereals resulted

in Slovenia paying 50 million dinars more per year to import grains from other parts of
Yugoslavia over what it could have paid for the same grains from other sources. At the
same time, the agricultural sectors important to Slovenia, particularly cattle raising and
fruit growing, received no comparable price supports. [Lazarevic (1999) p. 125-6]
Workers in Slovenia generally also suffered during the depression though Lazarevic
implies that the welfare of workers was never of much concern during the interwar period.
He notes that social policy remained backward throughout [Yugoslavia generally,
largely because of the uneven development of the poorer areas of the country which delayed
and restricted the development of social legislation and programs throughout the
country, including Slovenia Lazarevic (1999) p. 127]. In a very real sense, therefore, it can
be said that the industrial boom in Slovenia in the period between the wars was based to
a considerable extent on the exploitation of the labour force.
Slovenia=s grievances with the national government also extended to the tax regime.
Slovenia retained the 1896 Austrian tax system after 1918 but, because of infl ation, the
income tax burden rose with the fall in the value of the Dinar. Serbia opposed income
taxes and relied on indirect taxes. This did not change until a national system of direct
taxation was introduced in 1928. Slovenes argued, however, that the tax system continued
to transfer income out of the region. Prior to the formation of Yugoslavia, Slovenia
had been a net recipient of tax revenues within the Austrian empire. Now, it claimed it
was a net contributor. By the late 1930s, national taxes levied on Slovenes were 800 Dinars
while the average for the country was 450 Dinars. Including local and banate taxes,
the comparable fi gures were 907 Dinars and 586 Dinars. [Lazarevic (1999) p. 130]
However, these raw fi gures are somewhat misleading, simply because average Slovenian
incomes were also much higher than the Yugoslav average. When standardized for
income, the tax burden on Slovenia was only very slightly higher than over the rest of the
country. This is evident in table 1.1. In short, the tax system appears only mildly progressive
at the time.
Table 1.1
Taxes as Per Cent of Per Capita Income (circa 1939)
Slovenia Yugoslavia
National 20% 19%
National and Local (banate and municipal)
Source: Calculated from Lazarevic (1999) p. 130.
23% 21%
Certainly, Slovenia was the most highly developed region of the 1 st Yugoslavia. Per
capita income was 61 per cent higher than the national average in 1910 and Slovenia
clearly had a strong industrial head start when the new country was formed. Social
and living standards remained Asubstantially higher@ than for the rest of the country
throughout the period [Lazarevic (1999) p. 124]. National policies that favoured the more
populous Serbian and southern areas during the interwar period narrowed the income
difference to around 43 per cent though clearly without acting as a signifi cant break on
the development of the Slovenian territory. Summing up the whole period of the 1 st Yugoslavia,
Lazarevic concludes:
Slovenia=s 8 per cent of the population [6 per cent of the area of Yugoslavia] generated
a little over one-quarter of Yugoslavia=s total production, and provided over
one-fi fth of all jobs. Slovenian capabilities in the metal production and metal working
537

538
industries accounted for 51 per cent of the total Yugoslav capacity. In textiles and
leather working the fi gure was 37 per cent; in the paper industry 38 per cent; in the
chemical, glass and wood industries it was a quarter, and in electricity production a
fi fth. [Lazarevic (1999) p. 124]
Over the interwar period, Slovenia=s industrial capitalization doubled as did its industrial
employment. It retained a comfortable export balance in fi nished goods. At the
same time, the value of its industrial output increased two and a half times indicating a
healthy rate of productivity increase. Slovenia had reasserted the leading economic position
in the region that it had achieved prior to the 1 st World War. But a continuation of
the economic recovery and industrial development was stopped in its tracks by the Axis
invasion in 1941.
The Second World War was a pivotal event in the history of Yugoslavia and Slovenia,
both politically and economically. The damage to the economy and to the civilian population
was enormous. Yugoslavia was divided up between the Axis powers with the aid
of Yugoslav collaborators and Quislings, particularly in the so-called Independent State
of Croatia (which included most of Bosnia-Herzigovina) where the puppet Ustase fascist
regime was installed. Slovenia was partitioned. Northern Slovenia was annexed by
Germany which moved Austrians into the region to >Germanize= the area. Italy received
Ljubljana and the bulk of Slovenia but it attempted to subject the population by conversion
to fascism rather than by outright suppression [Darby, et al. (1966) p. 209]. The north
east, the agricultural area of Prekmurje, was occupied by Hungary.
Germany gained the most from the partitioning of Slovenia, securing almost three
quarters of the industrial capacity of the region. Italy got most of the rest leaving Hungary
with only a few per cent. Infl ation and the undervaluing of the Yugoslav Dinar did
their part in undermining the economic welfare of all the Yugoslavs but the real damage
came in the war itself, the resistance put up by the partisans and Tito=s fl edgling National
Liberation Army and the genocidal reprisals by the Germans to such resistance,
the hostilities between the fascist Ustase and the Serbs, and the battles between Tito=s
Liberation Army and the royalist Chetniks which increasingly allied themselves with the
Germans. But whatever the political and economic damage caused by the fi ghting itself,
it was less than that occasioned by the Germans when, facing defeat, they retreated destroying
and looting all industrial capacity in their wake. Lazarevic=s conclusion is rather
an understatement.
The Second World War marked a great gap in the economic development of Slovenia.
The promising progress being made was brought to a halt as the value of real
property and fi nancial assets plummeted. The extent of material war damage was
huge, not just because of the measures carried out by the occupying forces but also as
a result of the fi ghting itself, especially at the end of the war. And added to all of this
was the great toll in human lives that was paid by the people of Slovenia [Lazarevic
(1999) p. 137]

ECONOMIC DEVELOPMENT IN THE SECOND YUGOSLAVIA:
1945-1990
The triumph of the Yugoslav National Army under the charismatic Communist leader,
Josip Broz Tito, ushered in a new and very different political-economic regime from the
conservative, capitalist regime that had controlled the country during the interwar period.
The changes were, as one would expect, revolutionary, not just because of political ideology
of the new leaders, but also because of the popular reaction to the collaboration of so many
of the old economic elite with the fascist invaders. One early reform was the issuing of a
new currency in 1945 which devalued holdings of the old Dinar. As Darby, et al. note, the
effect of this and rent controls was Ato impoverish, and virtually eradicate, the small class
of town bourgeoisie which had played such an important part in political life in Yugoslavia
between the two world wars [Darby, et al. (1966) p. 237).@ The former ruling classes were
also weakened by the expropriation of the property of Germans and their collaborators,
limitations on the amount of land individuals could hold, and nationalization of four-fi fths
of all industrial property [[Darby, et al. (1966) p. 237]. On the political front, the elections
held in November of 1945 returned a vote of ninety per cent in support of the >People=s
Front=, dominated and controlled by the Communists, though to put this in perspective it
should be noted that the old opposition parties had pulled out from the vote in the face of
the popular support enjoyed by the Communists. Thus was ushered in four and a half decades
of Communist domination, if not rule, in the political-economic affairs of Yugoslavia.
Initially the political structure of the new Socialist Federal Republic of Yugoslavia (SFRY)
and the organization of the economy was patterned on the political and economic structure
and program of the Soviet Union. This was the short-lived era of state socialism and central
planning under a hegemonic Communist Party. The economy was based on state-ownership
and a centralized system of management in production, distribution, exchange, and
consumption. Integral to this system was the subordination of enterprises and republics to
national planning and budgetting machinery through directives and orders. At the apex of
the system was the Board of Ministers of Economic Divisions and its leading division, that
of Economic Planning. Individual enterprises were essentially administrative units of the
planning division and any profi ts (or losses) accrued to the national body. Distribution was
the responsibility of the Federal Ministry of Finance. In short, all individual incomes, state
and enterprise expenditures fl owed to and from the national treasury B Athe economy of
the country functioned as one big, enormous enterprise [Bilandzic (1978): quoted in Phillips
and Ferfi la (1992) p. 36] .@ In 1947 the fi rst fi ve year plan was introduced and in 1949,
the collectivization of agriculture was begun.
The economic challenge that faced Yugoslavia and the new government at the end of
the war was monumental. Eleven per cent of the population had been killed in the war,
forty per cent of manufacturing capacity was badly damaged or destroyed, almost a quarter
of the people were homeless, and the monetary system was fragmented among seven
different currencies. As well, at that time almost eighty per cent of the population were
peasants. The task of reconstruction, restarting the transition to an industrial economy,
and providing subsistence for the mass of the population was enormous. And yet by 1947
the prewar level of output had been regained [Horvat (1976) p. 6].
The Soviet model appeared to be a successful one in the early post-war years. However,
a number of developments over the next few years were to radically alter the political-economic
system in the SFRY. First was the expulsion of Yugoslavia from the Cominform in
539

1948 resulting from a dispute between Stalin and Tito relating to differences in political and
economic policies [Darby (1966) p. 246]. This caused a major collapse of economic relations
with the Communist countries which, in turn, caused serious problem because trade with
these countries was central to success of the economic plan. Second, drought and the attempted
collectivization of agriculture proved disastrous for agriculture. Thirdly, there was
growing doubts about the ideological premiss which underlay state ownership and central
economic planning. By 1950, the Chairman of the Federal Planning Commission and close
confi dant of Tito=s, the Slovene Boris Kidric, would argue that centralized state socialism
was only the fi rst, transition stage to socialist democracy and if pursued would end up producing
only >state capitalism= or etatism. AThe building of socialism categorically requires
the development of socialist democracy and a bold transformation of state socialism into a
free association of direct producers [Quoted in Horvat (1976) p. 11].@
Already by 1950, the transition to worker self-management had begun along with decentralization
of economic planning and decision-making to the republic and commune
level. Enterprises were now accountable for their own economic results and were allowed
to retain and redistribute a portion (albeit a small portion) of any profi ts earned and,
increasingly over time, to establish wage rates and the distribution of profi ts between
the salary fund, the accumulation fund and the fund for social programs. Until 1954,
however, the rate of capital accumulation and its distribution remained the exclusive jurisdiction
of the state. In 1954 this also began to change as enterprises were allowed more
discretion in determining the amount and distribution of investment.
Decentralization and the dismantling of the central state planning machinery had
some contradictory effects. Although the National political and economic institutions
lost their hegemonic power, the Republic institutions, including the single party structures
in the individual republics, moved to fi ll the power vacuum. Nevertheless, the economic
results of this fi rst period of stripping the state-ownership, centralist planning
system of its power resulted in superior economic results. During the period from 1952
to 1964, the national product per capita was constantly rising at an annual rate of 8.3 per
cent [Horvat (1986) p. 14].
The third period in the post-war economic history of Yugoslavia began with the reforms
in 1961-65 that ushered in the period of market (or self-managed) socialism. These
were in part a response to growing confl icts between the various republics and a desire to
increase reliance on market forces and self-management and to reduce political controls
through further decentralization. The economic reforms of 1965 were signifi cant and wide
ranging. Central economic planning was further weakened and became, in fact, merely
indicative planning. There was strong encouragement for economic integration with the
western economies including devaluation of the dinar, a reduction in customs protection,
and price realignment in accord with prices on the world market. Federal economic
authority was reduced resulting in a devolution of power to the republics, the banks and
the individual enterprises B indeed, a signifi cant >withering away= of the state.
This process, particularly in areas such as investment funds where the banks and enterprises
were given greater funding authority and profi tability was given much greater
emphasis; and in mandatory contributions and taxes on enterprises where they were reduced
with the intention of giving the enterprises more scope for self-fi nancing, further
weakened the role of the state in the economy. Especially important was the removal of
the national bank=s role as investment banker and the creation of self-managing communities
of interest to provide social services, including education and health care. State
540

fi nancing of investment dropped from around 56.4 per cent in 1963 at around 15 per
cent by the 1970s [Phillips and Ferfi la (1992) P. 43]. This transfer of the investment function
from the state to the banks in the eyes of critics (such as Horvat) became a critical
element in the eventual disintegration of the federal state which lost all control of the
dynamics, structure, and allocation of investments.
These reforms, however, had negative repercussions. Economic performance deteriorated
and bureaucratic political controls merely passed from the national to the republic
level. Furthermore, control by the banks and a rise of technocratic management further
removed workers from meaningful self-management while increased reliance on the
market created greater income disparities contributing to political dissension, regional
confl icts, and a rise in ethnic nationalism, the scourge of the interwar period.
Further reforms were undertaken to combat the rising dissatisfaction and regional
unrest beginning in 1971 and culminating in the new constitution of 1974 and the companion
economic measure of 1976, the Law on Associated Labour. By this time, the federal
government was reduced to minor status, its only revenues from customs duties,
minimal federal income taxes and revenues from federal institutions, and contributions
from the republics and autonomous provinces. The 1974 constitution and the 1976 Law
on Associated Labour embodied the fi nal, utopian vision of self-management designed
by its chief architect, the Slovene Edvard Kardelj. Thus, Yugoslavia entered into the period
of >total= or >socialist self-management.=
The complexity of the system of self-management through >basic organizations of associated
labour,= >composite organizations of associated labour,= >work organizations,= at
the enterprise level and of state functions through >self-managing communities of interest
or interest unions,= and multi-chamber assemblies of delegates is too complicated to be
detailed here. 1 Suffi ce it to say that it was not effective in revitalizing the Yugoslav economy
while the >withering away of the state= left a vacuum at the economic policy level thus encouraging
the Communist Party (offi cially the League of Communists) to expand its role at
the republic level, even though it was offi cially divorced from government. The effect was
exactly opposite to that which was intended. Etatism was revived, though at the republic
level rather than the national level, and real self-management atrophied.
The result was the economic crisis of the eighties. From the introduction of self-management
until the mid 1970s, Yugoslavia experienced strong economic and productivity
growth. In the late 1970s growth tailed off and after the two oil shocks and the monetarist
debacle of the early eighties, a decade of sustained economic crisis ensued, a period which
can accurately be described as stagfl ation B infl ation combined with low productivity
growth, income stagnation and rising unemployment. This is demonstrated in table 1.1.
Table 1.2
Growth and Prices in the Yugoslav Economy: 1948-1987
Annual Growth Rates %
Period Per capita Social Product Retail Prices Real Personal Income
1972 prices Per worker
1948-52 0.6 B B
1953-56 5.2 2.3 1.1
1957-60 10.2 3.0 9.1
1961-65 5.7 11.1 5.4
1966-70 5.9 10.0 7.3
1 For a summary of the system see Phillips and Ferfi la (1992) pp. 46-50.
541

1971-75 5.1 20.2 1.5
1976-80 4.3 17.4 0.9
1981-87 0.1 62.4 -3.3
Source: Cerne (1989) pp. 407-415.
The >cause= of the stagnation in the Yugoslav economy can not be attributed to a single
factor. Problems with the institutions of self-management and the interventions of
the Party played a part. So did the ethnic divisions and the reliance on foreign debt. This
was magnifi ed by Yugoslavia=s existence on the periphery of the industrial core countries,
particularly in an era dominated by monetarist contractionary economic policy.
Whatever the cause, the economic problems were real. They became a crisis in the late
years of the decade of the 1980s.
In December of 1989, the Yugoslav Prime Minister Ante Markovic, began a series of
economic reforms that effectively dismantled the system of self-management and in the
process began the process of conversion of the economy to the western European capitalist
market system. Moreover, the eventual effect was to dismantle the Yugoslav state
entirely. This culminated in the departure of Slovenia and Croatia from Yugoslavia in
1991 amid the growing chaos of civil war. 2 The collapse of Yugoslavia and the proclamation
of Slovenia as an independent state marked the fi rst time that Slovenes would have a
nation state. For how long is a question we will consider later. At the moment we should
consider the development of the Slovenian economy within the larger framework of the
Yugoslav Republic from 1945 to 1991.
542
SLOVENIA: 1945-1990
Economic growth and development in Slovenia followed much the same pattern as
that for Yugoslavia as a whole. This, of course, should be expected particularly in the early
years when centralized regulation and planning of the economy was in force. Slovenia,
as was the case in the 1 st Yugoslavia, was the most developed, the most industrialized
and the most affl uent republic in the new federation from the beginning and remained
so throughout the four and a half decades of the SFRY=s existence.
There are many who believe that Slovenia=s economic growth and development was
retarded by national offi cials in Belgrade as a result of resource and fi nancial transfers
from the richer republics, specifi cally Slovenia and Croatia, to the poorer southern republics
and provinces, specifi cally Bosnia and Herzigovina, Montenegro, Makedonia and
Kosova. 3 From the beginning, as early as 1945, Slovenia was critical of national economic
policy and centralized control Aas it became clear that the Slovenian republic would have
to slow its rate of progress over the coming fi ve years to accommodate the less developed
republics in the south, and assume the largest burden of the so-called >federative
construct= [Princic (1999) p. 159].@ This becomes a continuing criticism by the >Slovenian
separatists= of national economic policy throughout the nation=s existence. The statistical
evidence to support this, however, is not convincing as we will show below. Furthermore,
with each successive stage of reforms, the economic independence of the republics in-
2 For a more detailed discussion of the reforms and their failure and the subsequent dissolution
of Yugoslavia, see Phillips and Ferfi la (1992) chapter 6.
3 This is the underlying theme of Joze Princic=s economic history of post-war Slovenia, AThe
Slovenian Economy in the Second Yugoslav State (1945-1991)@ [Princic (1999) part III].

creased until by the late 1980s, Slovenia was virtually an independent economic state.
Similarly, the devolution of constitutional competencies had converted Yugoslavia from a
federation, with power fl owing from the top down, to a confederation with power residing
with the republics and delegated to the national level.
Slovenia emerged from the war with a devastated economy. Over 85 per cent of its
railway line was damaged or destroyed, many hundreds of railway buildings were destroyed
as were 175 bridges. Damage to industrial capacity, forests and agricultural land
was extensive and trade links with western Europe were cut off. The national goal was
to restore production to pre-war levels by 1947. Horvat, as noted above, says that goal
was reached at the national level though Princic disputes this for Slovenia [Princic (1999)
pp.156-7]. Still, Slovenia was well ahead of the country average for social output per
capita. In 1947, social product per capita in Slovenia was 63 per cent higher than for Yugoslavia
as a whole [Federal Statistical Offi ce (1986) p. 204].
Slovenia faced some particular economic problems in the aftermath of the war. National
plans called for extensive and non-sustainable exploitation of her forest resources (twice
the sustainable yield in 1951) to generate exports. This required addition transportation infrastructure
that absorbed much of the little capital investment resources allocated to Slovenia.
Further, the western region of the new Slovenia, previously under Italian occupation,
had been starved of capital and its economy had stagnated during the Italian period, but
the federal authorities were reluctant to allocate capital expenditure to the region until the
western boundary had been secured. In addition, Slovenia suffered, as did the rest of the
country, during this reconstruction period by the cessation of UNRRA aid and Hungarian
reparations, and the rupture of trade relations from eastern Europe and the Soviet Union
which cut off supplies of capital goods and forced Slovenia to redirect trade to western Europe,
Africa, the Middle East and even more distant lands. Also, the second wave of nationalization
in 1948 disrupted traditional production arrangements as did the collectivization
of agriculture in 1949-51 (though agricultural collectivization was never very extensive in
Slovenia). 4 As a result of this combination of factors, Princic reports, Slovenian output actually
declined by 3 per cent in the 1947-50 period [Princic (1999) p. 163].
The implementation in 1950 of the Kidric reforms B abolition of state property and
central administration in favour of social property and workers= self-management; abandonment
of multi-year state-administrative plans in favour of broad, >overall basic proportions=
allocations; and the enactment of a market-directed economy B proved effective in
increasing the rate of economic growth throughout the country and even faster in Slovenia.
In addition, economic development priorities began to shift in 1955 away from concentration
on heavy industry in favour of a more balanced approach directed at increasing
living standards and the provision of more consumer goods and also at reducing income
inequalities. Economic growth responded. Social product in Slovenia grew at an annual
rate of 5.5 per cent in the 1948-55 period, and 7.5 per cent in the 1955-65 period, slightly
faster in both periods than in Yugoslavia as a whole. The industry output growth fi gures
for Slovenia for the comparable periods were 9.1 and 9.7 per cent per annum and 9.1 and
12.0 for Yugoslavia as a whole [Federal Statistical Offi ce (1986) p. 204-205]. The workers
also took to self-management from the beginning with the establishment of over seven
hundred workers councils in industrial and other companies in 1950. Agricultural yields
4 Only 5 % of the agricultural population and 4 % of farm population were involved in 381
co-operative farms by the peak in 1951. Most of these reverted to marketing co-ops in subsequent
years. [Princic (1999) 165]
543

lagged behind the national growth rate, particularly in the 1951-55 period, but still grew at
a respectable compound rate of 2-2.2 per cent per year from 1951 to 1965, despite a rapidly
dropping rural farm population which fell from 49 per cent of the population in 1948 to 41
per cent fi ve years later. This was accompanied by a fi fty per cent increase in the number of
semi-proletarian worker-farmers to 71,000 [Princic (1999) 169].
There is some evidence that investment in Slovenia lagged somewhat in the 1953-65
period when the average growth rate in fi xed investment in Yugoslavia was 9.4 per cent
while that of Slovenia was 7.3 per cent. Furthermore, Slovenia invested only 29.4 per
cent of its social product compared with an average of 35.8 per cent for the nation as a
whole. However, this was more than offset by two factors, one the much larger capital
base (and social product) that Slovenia had at the outset; and two, the much higher
marginal effi ciency of capital (productivity) in Slovenia. The return to investment in
social capital per 100 dinars of investment in the SRS was 42.4 per cent compared to
35.7 per cent in the nation at large (1952-65 fi gures) [Federal Statistical Offi ce (1986)
p. 203] .
It was not all smooth sailing in this period. A second, more realistic, fi ve-year plan
was introduced in 1958 directed at modernizing and reconstructing capacity rather than
at new capital investment but infl ation, a rising trade defi cit, and a recession in 1959-60
meant targets could not be reached and this led to the beginnings of the new round of
reforms covering the period 1961-65. The social plan of 1961-65 and the 1965 Constitution
embodied the >Slovenian line=, and gave the republics much more autonomy and
discretion over economic matters. Slovenia approved Abecause it granted the republic the
right to direct the economic development in its own territory independently as a sovereign
state and social community... [Princic (1999)p. 178-9].@ However, this had its own
problems by baring the split between the developed and under-developed republics and
provinces thereby exacerbating ethnic tensions. But of equal or greater importance in the
long run, it launched Slovenia on the road to seeking greater integration with western
European countries and less reliance on the national market.
The Slovene economic plan of 1966-70, the fi rst involving regulation of the economy
by the republican government, refl ected this new, >liberal= focus. The economy of the SRS
responded. Social product expanded over the following eight year period after1966 by an
average of 6.8 per cent, investment by 9.1 per cent, industrial output by 4.9 per cent, and
agricultural production by 2.5 per cent. [Federal Statistical Offi ce (1986) pp. 202-205].
Indeed, the >good times= were to last until near the end of the decade of the 1970s, despite
the oil shock of 1973. But the storm clouds were gathering.
In 1971 a further constitution amendment transferred many more economic and fi nancial
powers to the republics. In 1974 the new constitution was adopted followed, in 1976, by the
Law on Associated Labour B effectively making Yugoslavia into a confederation and in the
process losing national control of the monetary system and the money supply. The oil shock
of 1973 had increased production costs and increased the trade defi cit but it also created huge
pools of low-cost fi nancial capital on the international market. The republics began to borrow
heavily on the international market and investment rose spectacularly, as previously noted,
by an average of over nine per cent per year in Slovenia up to the mid-seventies.
The availability of low-cost foreign capital was a mixed blessing. While it spurred
investment and consumption, it also spurred growing international debt loads, infl ation
and a widening trade defi cit while the productivity of the new investment dropped precipitously,
by 56 % in Slovenia between the 1966-74 and 1975-81 periods.
544

The second oil shock in 1978 followed by global monetarism initiated by the United
States that drove up international interest rates created the debt crisis in the developing
world (including Yugoslavia) which initiated the period of permanent economic crisis in
Slovenia and Yugoslavia that culminated in the collapse of the federation. This is clear
for Slovenia in fi gure 1.1, which depicts real growth rates of social product per capita for
Slovenia for most of the period after 1953. Only in one year during the 1980s did growth
exceed 2 per cent and in 6 of the ten years, the growth rate was negative. Real net personal
income per worker in Slovenia declined from 1980 to 1984 and again in 1987 and
1988 before rising briefl y in 1989 then dropping precipitously in 1990 by just under forty
per cent. Infl ation rates began the 1980s in Slovenia in the 30-40 per cent range before
rising steadily peaking at 1,385 per cent in 1989.
Repeated national stabilization plans were attempted after 1982 but to no avail. The
reasons were several. International debt and high interest rates were perhaps the initiating
trigger to the crisis but the inability of the federal government to introduce effective
monetary restraints or control the issuance of money due to the autonomy granted the
republics and the enterprises B and the consequent inability to introduce International
Monetary Fund conditionality provisions (which would probably only have exacerbated
the economic collapse in any case) B prevented the central bank and the federal government
from taking any effective action. In any case, rising ethnic tensions between the
republics prevented any co-ordinated policy response. No doubt some of the problem
can be traced back to the 1974 Constitution and the 1976 Law on Associated Labour
which created a system so decentralized and autonomous that a concerted policy was
impossible. At the same time horizontal mergers and self-management agreements had
greatly reduced market discipline on enterprises, banks and governments alike. Princic=s
conclusion is perhaps the relevant one: ABy [1985-89], Yugoslavia was function as an entirely
asymmetrical federation, no longer comprising a single economic area and without
a common market [Princic (1999) p. 195].@
Slovenia, however, can take a considerable amount of responsibility for the fi nal economic
dismembering of the federation. In its social plan of 1986-2000, provision was
made for reorientation of the republic=s economy, exports, imports, and industrial inputs
away from Yugoslavia and toward western Europe. This was a continuation of the trend
begun in the 1960s. In 1989, Slovenia introduced a law allowing it to determine which
federal laws it was willing to abide by; in March 1990, it declared its economic independence,
in January of 1991 it took control of customs and sales taxes and replaced them
with >voluntary contributions= to the federal government; in April 1991 it introduced its
own monetary unit for business accounts; and in June 1991 it declared its political independence.
The last move to complete economic independence was the adoption of
the tolar as the Slovenian currency in October 1991. Slovenia was, for the fi rst time, an
independent nation state and national economy.
SUMMARY
The history and development of Slovenia in the 2 nd Yugoslavia, though now sometimes
disparaged by contemporary critics, was B with the exception perhaps of the last
decade of the eighties B a generally positive economic experience. (The evidence is given
in some of the statistics in Appendix 1.A.)
545

546
Figure 1.1.
After a decade and a half of fi rst depression, and then war, Yugoslavia as a country, and
Slovenia as one of its constituent republics, embarked on an ambitious course of industrialization
and economic development. For the fi rst three-and-a-half decades the process
could be considered a considerable success. For Slovenia, the process of industrialization
begun in the 1920s and interrupted by the depression and war, was largely completed. The
country moved from being a rural agricultural economy dominated by a peasant orientation
to being a modern, urban and industrial one. The standard of living, social services
and level of development rose to western European standards, albeit on the lower side. At
the same time, political and economic decentralization permitted Slovenia to create effectively
an economic state within a state that promoted and enabled the fi nal political break
with Yugoslavia, though not without considerable initial economic cost.

APPENDIX 1
Selected Economic Indicators: Yugoslavia and Slovenia
1945-1985
Annual Rates of Growth
Social Product Per Capita, din., 1972 prices
1948-84 1948-55 1956-65 1966-75 1976-85
Yugoslavia 4.4 2.4 7.4 4.8 2.6
Slovenia 5.0 4.6 6.7 6.0 2.2
Social Product, min. din., 1972 prices
Yugoslavia 5.5 5.1 7.4 5.8 3.4
Slovenia 5.8 5.5 7.5 6.8 3.7
Industry Output Index
Yugoslavia 8.6 9.1 12.0 7.1 5.0
Slovenia 7.7 9.1 9.7 7.8 4.2
Gross Fixed Investment
1953-83 1953-65 1966-75 1976-83
Yugoslavia 6.0 9.4 5.9 1.1
Slovenia 5.3 7.3 9.1 -1.2
Percentage Share of Fixed Investment in Social Product
Yugoslavia 31.0 35.8 30.0 29.8
Slovenia 25.4 29.4 24.6 29.7
Growth in Agricultural Output
1951-84 1951-55 1956-65 1966-75 1976-84
Yugoslavia 3.6 9.6 2.9 2.9 2.2
Slovenia 2.6 2.2 2.0 2.5 3.5
Selected Slovenia:Yugoslavia Ratios
(Yugoslavia = 100)
Fixed Assets per Worker 1952 1983
122 132
Capital Equipment per Worker 111 136
Share of Social Product (%) 1947 1984
14.9 16.8
Social Product per Capita 163.2 201.3
Retail Sales per Capita 1952 1984
170.2 179.8
Net Personal Earnings per Worker 1965 1984
124.1 121.7
Expenditures on Social Services 1966 1983
180 197
Source: Federal Statistical Offi ce, Yugoslavia 1945-1985: Statistical Review (Beograd: 1986)
547

548
CHAPTER 2
TRANSITION AND ECONOMIC
DEVELOPMENT IN SLOVENIA:
THE FIRST DECADE OF INDEPENDENCE
The road to economic and political independence which, arguably, Slovenia began to
take in the 1960s, reached its destination with the declaration of independence in June
1991. Though the process of reorientation of economic and trade relations away from
its Balkan partner republics and eastern Europe and towards western Europe had been
underway, and with increasing purpose, in the period immediately before independence,
the political break and the short (though relatively non-destructive) war in Slovenia that
followed caused an immediate intensifi cation of the depression and economic crisis that
had wracked the Federation in its fi nal years. Moreover, the prolonged and bloody process
of dismemberment of Yugoslavia that followed for over half a decade, further disrupted
Slovenia’s economic ties with its former partners.
This was not an auspicious beginning for a newly independent country which was
also faced with the problems associated with the transformation of the economy from
self-managed socialism to market economy, a requirement if Slovenia was to be accepted
into the European Union which was the stated goal of the country’s leadership from
the beginning. In short, the economic task facing Slovenia in 1991 was macroeconomic
recovery and growth and building new economic and labour market institutions in the
western European capitalist market mould. While the republics and provinces in much
of the former federation are still attempting to put the pieces of their economies back
together and regain a semblance of their former standard of living, Slovenia has been
largely successful in engineering a relatively complete recovery and in restructuring
and reorienting its economy in its pursuit of western Europe integration. Slovenia has
accomplished this without the extremes of social turmoil, crime, asset profi teering by
the nomenclature, impoverishment of the working class and collapse of living standards
that has characterized the process of transition to the privatized market economy
in so many of the other transitional economies of central and eastern Europe. In this
chapter we will concentrate on the macroeconomic performance of Slovenia in its fi rst
decade.
WAR AND TRANSITION: 1991- 1993
The fi rst few years were a rather traumatic period for the economy of one of the
world’s newest nations. After absorbing considerable direct and indirect costs from
the breakup of the Federation and the wars and the refugees that resulted, however,
Slovenia recovered relatively quickly, while its economic institutions have evolved into
a pattern more familiar with those in western Europe. Indeed, the country has targeted
to reach the Maastricht criteria for entry into the European Union (EU) and the European
Monetary Union (EMU) to which it has applied with accession planned for the
year 2004.

Table 2.1
Selected Macroeconomic Indicators 1988-1994
Macroeconomic
Indicator 1988 1989 1990 1991 1992 1993 1994
Real Growth in GDP - 1.7 - 1.8 - 4.7 - 9.3 - 5.5 2.8 5.3
Per Capita Income
(PPP USD)* 7,000 7,900 11,300 9,108 8,109 8,579 9,465
Gross Domestic
Investment (% GDP) na na na 15.2 17.6 19.3 20.9
Gross National Saving
(% GDP) na na na 24.3 24.9 21.5 24.8
Employment Growth - 0.0 - 0.1 - 3.3 - 8.3 - 7.9 - 3.6 - 1.3
Unemployment Rate
(Survey method) na na na 7.3 8.3 9.1 9.1
Unemployment Rate
(Registered) na na 4.6 8.0 11.1 14.1 15.0
Registered Unemployed/Job
Vacancies .31 .28 .85 1.43 1.44 1.26 .82
Infl ation Rate
(CPI year over year) 300 1,385 652 117.7 207.3 32.9 21.0
Change in Exports
(USD): goods na na }- 9.3 - 6.4 42.1 - 5.9 10.9
(%) services na na } - 40.4 20.4 14.2 29.6
Change in Imports
(USD): goods na na na - 14.4 29.9 5.5 13.0
(%) services na na na - 5.4 29.2 -2.1 10.9
Source: See Appendix 2.A. *Author’s estimates for 1988-1990.
The economic transition from a state of a federal republic to an independent nation,
however, has not been an easy one. The most immediate problem Slovenia encountered
upon independence involved the loss of the internal Yugoslav market, a problem compounded
by the rapid shrinkage in the markets of the former Communists countries of
central and eastern Europe and the recession in western European markets. As one of
Slovenia’s most prominent economists, Joze Mencinger, has admitted, the collapse of the
Yugoslav market alone is suffi cient to explain the depression that gripped the Slovenian
economy in the years immediately following its break with the Yugoslav Federation. According
to Mencinger, Slovenia’s loss of exports with independence was 45.2 % which included
a 74.1% drop in exports to former Yugoslavia. [Mencinger (1997) 210] The depression
persisted until mid-1993 when exports reached their lowest point. Slovenia, with an
internal market of only two million people and heavily dependent on external trade, very
quickly had to develop alternative markets for exports, particularly given her almost nonexistent
foreign currency reserves which were equivalent to just 14 days worth of imports.
The result of the collapse of foreign and domestic markets and the loss of almost 300
business subsidiaries in the other republics of the former Yugoslavia was a sharp decline
of between 15 and 20 per cent in real Gross Domestic Product (GDP) and a quarter or
more in real manufacturing output between 1990 and 1993, before the trough of the depression
was reached in mid-year. Selected fi gures on macroeconomic performance are
given in table 2.1.
However, the trough of the depression was reached in mid-1993 and growth began in
the second half of the year reaching 5.3% in real terms in 1994 and 4.1% in 1995.
549

550
TOURISM, TRANSPORTATION, AND BANKING
Particularly badly hit by the depression and the turmoil that followed independence
were the tourist and transportation industries. The fracture of the former Republic of
Yugoslavia posed particular problems for two of Slovenia’s major industries, tourism and
transportation. Despite the fact that since the autumn of 1991 Slovenia has been safe and
secure, many foreigners still associated it with the turmoil further south with devastating
effects on tourism. Following disastrous seasons in 1991 and 1992, energetic promotion
campaigns launched early in 1993 and directed at the European market halted the downward
trend and prompted a modest recovery in 1994 only to have the number of foreign
visits stall again in 1995. However, since 1995 there has been a moderate recovery though
the level of foreign visits in 2000 was still only a little over sixty per cent of the immediate
pre-independence years. (See Table 2.2).
Somewhat offsetting the decline in foreign tourism in the early nineties was the
growth of domestic tourism which rose steadily in the fi rst half of the decade since independence.
However, the peak in domestic tourism appears to have occurred in 1995 and
the level since then has stabilized or declined slightly. What is perhaps tourism’s most
important impact is as a source of foreign exchange. In 1997 the foreign currency infl ow
attributed to tourism reached in excess of USD 1.1 billion. Its impact on overall economic
activity is less clear. Employment in tourism in mid 1998 stood at slightly less than two
per cent of the employed labour force and the absolute number employed in the industry
has been falling despite the modest recovery since 1992.
The other industry most adversely affected was transportation as a consequence of
the interruption of the transshipment function between western Europe and the Middle
Ease, Greece, Turkey, the former Communist countries of south-central Europe, and the
former republics of Yugoslavia. The loss of this traffi c has been estimated to be worth as
much as US$ 300 million per year. Despite a slight recover in 1992, the industry contin-
Table 2.2
Tourism – Nights Spent
Foreign Domestic
Year Number Growth Rate Number Growth Rate
(000s) (%) (000s) (%)
1988 6122 0.7 2686 -9.5
1990 5346 -8.5 2611 -2.2
1991 2177 -59.3 2709 3.7
1992 2015 -7.4 3083 13.8
1993 2012 -0.1 3372 9.4
1994 2481 23.3 3385 0.4
1995 2436 -1.8 3448 1.9
1996 2551 4.8 3282 -4.8
1997 3076 20.6 3303 0.1
1998 3058 -0.6 3221 -2.5
1999 2741 -10.4 3315 2.9
2000 3403 24.2 3313 -0.1
2001 3813 12.0 3317 0.1
Source: IMAD, Slovenian Economic Mirror, various issues; Bank of Slovenia, Monthly Bulletin, June-July 2002.

ues to languish and in 1997 the index of freight handled had fallen to sixteen per cent
below its 1992 level [Mirror, Sept. 1998, A4].
On the brighter side has been the growth of the airline industry. The National airline
Adria was badly affected in the early years of independence when its aircraft and airport
were damaged by bomb attacks and Slovenia’s air space was closed. This forced Adria
to move its operations to Klagenfurt, Austria, some 90 km from Ljubljana, and to cancel
60 per cent of its fl ights. In January 1992 Adria resumed operating from Ljubljana but
initially its load factor was still well below pre-independence levels. However, in recent
years there has been a marked pickup in air traffi c.
RECOVERY AND GROWTH: 1994-2000
The broad base of the recovery that followed the trough in 1993 is evident in the table
2.3. The annual real growth rate averaged 4.3 per cent from 1994 through 2001. The recovery
was initially propelled by a rapid rise in wages and salaries (in real terms by 11.7 % in
1993) and the consequent increase in domestic demand — consumption demand increased
by 10.9 % in 1993 — and by a revival in investment which increased from an average of just
over 17 per cent of GDP in the 1991-3 period to an average of just under a quarter of GDP
over the rest of the decade to 2001, an average increase of almost fi fty per cent per year over
the depression years. In 1994 domestic and investment demand was supported by a strong
Table 2.3
Selected Macroeconomic Indicators: 1994-2001
Macroeconomic
Indicator 1994 1995 1996 1997 1998 1999 2000 2001
Real Growth in GDP 5.3 4.1 3.5 4.6 3.8 5.2 4.6 3.0
Per Capita Income
(PPP USD) 9,465 12,500 13,200 14,100 14,800 15,000 15,590 17,370
Gross Domestic Investment
(% GDP) 20.9 23.3 23.4 24.1 25.6 28.4 27.8 25.4
Gross National Saving
(% GDP) 24.8 22.8 23.5 24.1 24.9 24.5 24.6 25.4
Employment Growth - 1.3 - 0.1 - 0.4 + 0.2 0.2 1.8 0.8 1.4
Unemployment Rate
(Survey method) 9.1 7.4 7.3 7.4 7.9 7.6 7.0 6.4
Unemployment Rate
(Registered) 15.0 13.9 13.9 14.4 14.5 13.6 12.2 11.6
Registered Unemployed/
Job Vacancies .82 .82 .79 .96 .89 .77 .67 na
Infl ation Rate
(CPI year over year) 21.0 13.5 9.9 8.4 8.0 6.1 8.9 8.4
Change in Exports (USD):
goods 10.9 18.2 0.2 1.2 6.9 - 5.7 12.8 6.6
(%) services 29.6 12.1 5.1 - 3.8 0.0 - 4.8 11.8 4.6
Change in Imports (USD):
goods 13.0 23.0 - 0.6 - 0.8 7.0 - 1.1 6.1 2.2
(%) services 10.9 23.3 2.2 2.1 5.6 3.3 6.0 1.1
Source: See Appendix 2.A. *Author’s estimates for 1988-1990.
551

ecovery in exports of goods and services and this was only partially offset by an increase
in imports. The export boom, however, lasted only for two years and in 1995 was offset by
an even greater increase in imports of goods and services leaving a modest current account
defi cit. Similarly modest current account surpluses occurred in 1996 and 1997 followed by
sustained signifi cant defi cits in the following three years, particularly 1999 when exports
of both goods and services fell. A strong increase in exports of both goods and services in
2001 that was not offset by increases in imports, however, brought the current account into
surplus for the fi rst time since 1997.
Despite this relatively impressive rate of growth since 1993, real GDP did not return
to its pre-independence level until 1996. According to the Institute of Macroeconomic
Analysis and Development (IMAD), the index of GDP in 1997 stood at 103.2 compared
to the base of 100.0 in 1990 [IMAD, 1997]. At this point GDP, measured at Purchasing
Power Parity, approximated the same level as the two lower-income members of the European
Union, Greece and Portugal [Mirror (Sept. 1998) p. 3]. Since that time, real GDP
has increased by around 18 per cent giving an index in 2001 of 121.4. In 2000 the GDP
per capita in Purchasing Power Parity for Slovenia was given as 15,590, for Greece 15,570,
and for Portugal, 16,520. [SURS (2002) pp. 64-69] Slovenia’s standard was seventy per
cent of the EU average in 2000 but, except for Cyprus, remained well above the average
for the other countries on the EU accession list for 2004.
However, much as in western Europe and until more recently in North America, the recovery
after 1993 was not marked by a commensurate reduction in unemployment. Indeed,
as Table 2.4 shows, the reduction in the unemployment rate after 1994 can be partly attributed
to a decline in the labour force as participation rates decreased, though it has been
suggested that much of this decline can be traced to the growth in the unoffi cial or “shadow”
economy which at mid-decade was estimated to equal 30 per cent of the total of offi cial
Table 2.4
Employment and Labour Force
Labour Market Statistics 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
Labour Force
IMAD (Formal) 943 969 930 936 952 946 978 978 959 968 996
Bank of Slovenia 887 885 873 867 862 869 871 877 874 881
Participation Rate
(age 20-59) na 79.6 80.1 78.5 77.6 77.0 77.3 77.7
Participation Rate
(age 15-65) 69.1 68.4 70.6 70.7 69.1 69.4 70.1
Total Employment* (000s) 851.3 791.6 768.2 751.7 751.5 744.3 743.4 745.2 758.5 768.2 779.0
Registered Unemployment
(000s) 75.1 102.6 129.1 127.1 121.5 119.8 125.2 126.1 119.0 106.6 101.9
Unemployment Rate (%) 8.1 11.5 14.4 14.5 13.9 13.9 14.4 14.5 13.6 12.2 11.6
Labour Market Statistics 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
Un. Rate by ILO
Defi nition (%) 7.3 8.3 9.1 9.1 7.4 7.3 7.4 7.9 7.6 7.0 6.4
Real Gross Wage Growth
per employed (%) -10.9** 0.7 11.7 4.7 5.1 5.1 3.2 1.6 3.3 1.6 3.3
Source: IMAD, Autumn Report, 1997; Spring Report, 2002; Slovenia, Economic Mirror, April 1996; Bank of Slovenia,
Monthly Bulletin, August 2002. * Before 1997 excludes employees in fi rms with less than three employees; **Net wage
growth in 1991.
552

economic activity. [Swarzberg, 1995, 11] There is some support for this explanation in the
difference in employment numbers given in the “Current Statistics” and those reported by
the “Labour Force Survey”. (Persons in employment not covered by current statistics rose
from around 44 thousand in 1992 to over 81 thousand in 1996-97. [IMAD 1997, 64])
In any case, total employment, the labour force and participation rates declined fairly
steadily in the early 1990s, until about 1996-97 after which employment and the labour
force began a sustained expansion while participation rates remained relatively constant or
rose slightly for the prime age labour force. Real wages grew continuously after the trough
of the depression, in some years quite strongly. After the recovery and from 1995 through
2001, the average annual growth rate of real wages was 3.3 per cent.
STRUCTURAL CHANGE IN THE ECONOMY
The move away from a socialist self-managed system that had its roots in traditional
communist-style industrialism with its concentration on heavy industry and goods production
had obvious implications for the structure of the economy once the structure of regulation
had been replaced by that of the capitalist market. Typically in socialist systems, even
market socialist systems, the service sector was underdeveloped. What is evident in the
Slovenian economy is a fairly rapid increase in the service sector in the climb out of depression
compensating for the goods producing sector which only reached pre-independence
levels of output by the end of the decade. Agriculture has never recovered and still stands
at only ninety per cent of its pre-independence output a decade later. In contrast, output of
the service industries had suffered only minor setbacks in the post-independence depression
and had more than recovered by 1995 and by 2000 had outstripped goods production
by a factor of almost eight times. The most rapid expansion of output in the transition period
was in non-market services, specifi cally government services including education and
health which showed the greatest gain over the period of the 1990s. It is perhaps ironical
that the greatest gain in the period of transition to a capitalist market economy was in the
state, non-market sector (see table 2.5). It appears that most of the structural change occurred
in the period of economic dislocation that followed independence. Since then, the
trends in most industries have been consistent, with goods production following a slower
growth rate than services. The one exception is construction which, after a dismal performance
in the fi rst half of the decade, has shown stellar growth between 1995 and 2000. The
resulting contribution of major sectors and industries to total economic (branch) output is
given in table 2.6.
Table 2.5
Distribution of Output: Selected Sectors and Industries
Indices of Real Output:1990-200
(1990 = 100)
1990 1995 1996 1997 1998 1999 2000
Sectors
Goods 100.0 83.5 85.9 90.6 94.2 98.0 104.1
Services 100.0 107.4 111.9 116.2 120.1 125.9 131.1
Market 100.0 105.9 110.1 114.5 118.6 123.8 130.3
Non-Market 100.0 111.7 114.5 122.2 127.0 133.2 138.7
Selected Industries
Agriculture 100.0 92.6 93.5 90.7 93.6 91.7 91.7
553

Manufacturing 100.0 81.6 82.9 88.5 92.5 95.3 103.5
Construction 100.0 84.0 95.1 102.5 107.2 124.1 127.6
Hotel and
Restaurant 100.0 89.5 93.5 96.9 97.8 100.7 110.7
Source: Statisticni letopis Republike Slovinije, 2001, table 28.12.
Table 2.6
Sector and Industry Share of Output
Share of Total Output of Branches by Selected Sectors and Industries: 1990-2000
(% contribution)
1990 1992 1993 1995 1996 1997 1998 1999 2000
Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Goods 50.3 45.8 43.2 42.1 41.8 42.2 42.4 42.2 42.7
Services 49.7 54.2 56.8 57.9 58.2 57.8 57.6 57.8 57.3
Market 87.4 85.6 84.3 83.1 83.3 82.9 82.9 82.8 83.0
Non-Market 12.6 14.4 15.7 16.9 16.7 17.1 17.1 17.2 17.0
Agriculture 5.5 5.2 4.9 4.5 4.4 4.1 4.1 3.8 3.6
Manufacturing 36.4 32.0 29.9 28.3 27.7 28.3 28.6 28.2 29.1
Construction 4.4 3.4 4.6 5.0 5.5 5.6 5.7 6.3 6.2
Hotel and Restaurant 2.7 2.6 2.8 3.0 3.0 3.0 2.9 3.0 3.0
Source: Authors’ calculations from Statisticni letopis Republike Slovinije, 2001, table 28.12; IMAD, Spring Report, 1996.
What this data shows is that, as the recovery took place from the post-independence
depression, the importance of the goods producing sector declined relative to the service
producing sector and that the non-market sector (the government social sector) rose relative
to the market (private) sector, at least until about 1997 after which the distribution
stabilized. It is perhaps somewhat ironic that the transition from a self-managed to a market
economy involved a signifi cant increase (over a third between 1990 and 2000) in the
relative size of the non-market sector as a result of the takeover of social services by the
state. The relative decline in goods production is largely accounted for by manufacturing
though almost all this decline took place in the crisis period between 1990 and the recovery
after 1993. However, in real terms, manufacturing only reached its pre-independence
level of output in 2000 after a generally slow recovery from the depression years.
554
THE FINANCIAL SYSTEM
Slovenia’s recovery also required a new national currency to replace the unstable Yugoslav
Dinar. The new Slovene currency, the Tolar, was introduced in October 1991. This
was the fi rst step in establishing Slovenia’s international status. The second was membership
in all the major international fi nancial institutions, considered necessary to acquire
credibility in trade markets and to obtain access to international fi nancial markets and
development credits. The status of Slovenia was clarifi ed somewhat by the Badminter
arbitration commission ruling in July 1992 dissolving the Yugoslav Federation and assigning
Slovenia 16.4 per cent of its debt obligations. By mid-1993 Slovenia had become
a member of all major international organizations — 34 in total.
A fi rst move towards joining the European Union was made in May 1993 when the
country was admitted to the Council of Europe. In 1996 Slovenia’s application for associate
status in the EU was fi nally approved and in June the country applied for full membership
in the European Union. At the same time, in January 1996, Slovenia became a full

member of the Central European Free Trade Area ( CEFTA) joining Hungary, the Czech
Republic, Slovakia and Poland — countries which together with Slovenia were competing
to become full members of the European Union.
The third step in international economic integration was taken in September 1995
when the Tolar became fully convertible. This was made possible by the rebuilding of foreign
reserves and the lowering of foreign debt obligations. By the end of 1995 external debt
servicing was estimated at just 7.2 per cent of the value of merchandise exports, up slightly
from 1994 (5.6%) but still considered low, particularly relative to the servicing coeffi cients
of other central European countries in the process of transition. At the same time foreign
exchange reserves had risen to over US$ 3 billion, suffi cient to fi nance four months of imports
and 15 per cent in excess of total foreign debt. [Bank of Slovenia, Nov. 1998, 60-61].
The reform of the banking system was begun quickly though it was still not complete at
the end of the decade of the nineties. In 1991, the fi rst bank legislation was passed changing
the status of the banks from decentralized fi nancial agencies of the enterprises (with a resulting
substantial bad loans problem) into European style independent institutions. However,
most of the new banks were small and many required rehabilitation due to the bad loans,
particularly given the poor performance of many enterprises in the economic depression following
independence. Rehabilitation of the banks was largely achieved by 1997.
On the other hand, one bank, the Nova Ljubljanska Banka, (N-LB), dominated the
banking sector. As late as 1993 it accounted for approximately 75 per cent of the country’s
bank assets and 80 per cent of its external transactions. Divestiture of its regional and local
branches and recapitalization in July of 1994 and the subsequent downsizing reduced its
dominant position though it still remains the leading bank in the country and together with
the Nova Kreditna Banka Maribor (NKBM), both still state-owned banks, they conduct
around 40 per cent of all Slovenian bank operations. In 2000 the three largest banks in Slovenia
(N-LB, NKBM, and SKB Banka) accounted for over half of all Slovenian bank assets.
The remaining assets were shared by the other 18 registered commercial banks operating
in the country, several of them Austrian or German owned.
In fact, the number of banks in so small a country as Slovenia has been a concern
of the government and of the banks themselves. In an attempt to stop the proliferation
and to promote bank mergers, legislation was passed raising the capital required to start
a bank from DEM 5 million to DEM 60 million, fi rst only for foreign banks and then in
1994 for all banks. However, rather than promoting the consolidation of the still shaky
banking system, the measure prompted the banks to issue securities, fl ooding the market
and sopping up DEM 123 million, or 90 per cent, of securities funds available [Rop, Kusar
and Mramor, 1995, 403]. The Bank of Slovenia, the central bank, again raised the capitalization
requirement in 1997, from 4.08 bn SIT to 5.0 bn SIT, many times higher than the
capitalization ratio required in the EU. Since foreign banks are not allowed to establish
branches in Slovenia without forming a fully capitalized subsidiary this has been a major
barrier to the entry of more European banks.
Slovenia’s EU association agreement and its proposed entry into the EU is forcing it to
further reform its banking system. New bank legislation has been in the works for almost
three years and a draft was introduced into the Legislature in the spring of 1998. While it
further liberalizes current bank regulations along the lines of European Union legislation,
it stops short of meeting all the EU requirements and does not address some of the issues
raised by the EU. In particular the European Commission has noted a concern with the small
size of so many of the banks, their subsequent high operating costs, the lack of competition
between the banks including the interest rate cartel maintained by them, restrictions on port-
555

folio capital infl ows, continued public ownership of two of the largest commercial banks, and
the requirement for capitalization of foreign branches [European Commission 1997, 26].
The banks themselves began to discuss consolidation. The two largest, Nova Ljubljanska
Banka and SKB Banka, announced merger talks were underway in March of 1998, a
merger that would have given the new bank a reported 46% share of assets [Thompson
BankWatch, Internet Webpage, June 1998]. It was expected that, if completed, this would
force a major merger movement among the remaining eight or so of the largest banks in
the country. It would also involve the privatization of N-LB since SKB is already privately
owned, 49 per cent by foreign investors. However, for political reasons this was not proceeded
with. As a result, the structure of the Slovenian banking system as of the end of
2000 is described in table 2.7 with the leading seven banks holding approximately three
quarters of all bank fi nancial assets.
Table 2.7
Market Shares and Growth of Assets of Major Banks
Name Nominal Growth in % Market share of Assets in %
1999/98 2000/99 31 Dec 1999 31 Dec 2000
NLB 13.9 20.3 28.0 28.5
NKBM 12.9 14.4 12.0 11.6
SKB 9.4 5.1 11.5 10.2
Banka Koper 22.4 18.1 6.3 6.2
Banke Celje 15.3 20.8 5.8 5.9
Abanka 21.3 22.1 5.6 5.8
Gorenjska banka 20.6 22.1 4.9 5.0
Top 7 Banks 14.7 17.2 73.9 73.2
Source: Bank of Slovenia, Annual Report, 2000.
556
THE INTERNATIONAL SECTOR AND INTEGRATION WITH EUROPE
The primary determinant of the longer term future of the Slovenian economy will be
the international sector. Given the very small size of the domestic market, even if highly
protected, exports (including tourism and transportation) become the critical element in
economic growth. In 2001 the dependence of the Slovenian economy on exports (exports
of goods and services as a percentage of GDP) was 60.0 %. The measure of total dependence
on international trade (exports plus imports as percentage of GDP) stood at 120.7 %
[IMAD, Spring Report 2002, 123]. What are the prospects for increased external markets?
There are three areas to explore — the republics of ex-Yugoslavia, the former communist
countries of central and eastern Europe, and western Europe, in particular the EU.
The decline in exports to the former Yugoslav republics between 1991 and 1992-93
is estimated at approximately twenty per cent of Slovenia’s GDP, even before the full
implementation of United Nations sanctions. While imports also fell, the net fall in aggregate
demand is estimated at almost ten per cent of GDP. The fall in imports from the
former republics also represented a burden on the Slovenian economy since a signifi cant
portion of these imports constituted raw materials and intermediate goods necessary for
domestic and export production. The loss of the Yugoslav market was also a barrier to
attracting foreign investment interested in serving the much larger market of the former
Federation. Therefore, the re-establishment of an integrated Balkan market should have
a signifi cant part of any long-term Slovenian strategy. Though Slovenia has a large trade

surplus with the republics of ex-Yugoslavia, continuing problems of sanctions, economic
restructuring, post-war reconstruction, and the continuing crisis in Kosovo promise slow
growth in this market for the foreseeable future. However, negotiations are underway to
conclude a free trade agreement with neighbouring Croatia though frictions between the
two successor states have arisen over border issues and the future of the Krsko nuclear
power plant located in Slovenia but which also supplies power to Croatia.
Prospects for expanding trade with central European counties appeared more immediate
with Slovenia’s entry into the CEFTA in 1996. Indeed, spurred by quite impressive
labour productivity growth in the last few years averaging just under 3 3/4 % per year
from 1993 through 2001, exports to the other countries in CEFTA accelerated in 1995
by 31% though this increase was more than matched by the growth in imports (40 per
cent), a trend that has continued. CEFTA has become the third largest trading partner for
Slovenia after the EU and Croatia and accounts for around double the export trade with
countries of the former Soviet Union in 2001. At the same time, while free trade agreements
have also been negotiated with the Baltic countries, these are not major markets
for Slovenian goods and services accounting for less than half of one per cent of Slovenia’s
exports in 2001 [Bank of Slovenia, Monthly Bulletin, August 2002].
The key market is western Europe where Slovenian strategy has been to apply for associate,
and eventually full, status in the EU and to move its institutions and policies into
conformity with European standards. To a certain extent, this strategy has already paid
off in the form of increased market penetration, particularly in Germany, Italy, France and
Austria. Taken together, the percentage of Slovenian foreign trade accounted for by the EU
rose from 52% in 1992 to 65.5% in 1997 and 65.1 % in 2001. This latter fi gure compares with
just 7-9 % of foreign trade conducted with CEFTA. The following table gives the country by
country and regional block distributions of exports and imports for Slovenia’s fi ve largest
trading partners and for major trading areas for 2001. The obvious importance of Germany,
Italy, Croatia, Austria and France is indicated by their dominant shares.
Table 2.8
Dominant Foreign Trade Partners:2001
Country Export Share Import Share
(% of total exports) (% of total imports)
Germany 26.2 19.2
Italy 12.5 17.7
Croatia 8.6 4.0
Austria 7.5 8.3
France 6.8 10.6
Rest of World 38.4 40.2
EU 62.2 67.6
Former Yugoslavia 16.9 5.3
CEFTA 8.0 9.5
Former Soviet Union 4.0 3.1
Non-European Countries 7.0 12.5
Source: Bank of Slovenia, Monthly Bulletin, August 2002.
Talks for the accession of Slovenia to full EU status have progressed to the point that the
EU projected Slovenian accession in 2004 along with nine other countries (Czech Republic,
Hungary, Poland, Slovakia, Estonia, Latvia, Lithuania, Malta and Cyprus). Slovenia likes
to point out that in a number of economic indicators it is doing better than even the most
developed EU countries, at least in terms of the convergence criteria set by the Maastricht
557

Treaty for EU countries in order to qualify for entrance into the European Monetary Union.
Table 6 shows four (out of fi ve) Maastricht criteria and the fulfi llment by the member EU
countries and for Slovenia. The fi fth criterion is a stable foreign exchange rate which all
countries in the union except Greece fulfi ll. Despite the fact that the majority of the countries
in the EU failed to meet all of the criteria, the EMU went ahead in January of 1999 with
only Greece (which failed to meet any of the criteria) excluded, though Britain, Sweden and
Denmark chose to remain outside the monetary union, at least initially.
Slovenia, by comparison, excels beyond any in the EU in the so called “budget criteria”
(budget defi cit, level of public debt) but much worse in the “monetary criteria” (infl ation rate,
long term interest rates). At the end of 2001 the percentage of public debt in Slovenian GDP
had fallen to an estimated 26.9 % of which a little less than half (13 %) was foreign long-term
debt [Calculated from Bank of Slovenia, Monthly Report, August 2002]. This puts Slovenia
second only to Luxembourg in Europe in terms of low level of public indebtedness.
Table 2.9
Slovenia, the EU and the Maastrict Criteria
Budget Public Infl ation Interest Status**
Defi cit* Debt Rate Rate /EMU
Maastricht Criteria (3% GDP) (60% GDP) (3.2%) (7%) Entry
Austria 2.5 66.1 1.1 5.6 Neg /Yes
Belgium 2.1 122.2 1.4 5.7 Neg /Yes
Denmark -0.7 65.1 1.9 6.2 Neg / No
Finland 1.1 55.8 1.3 5.9 Pos / Yes
France 3.0 58.0 1.2 5.5 Pos / Yes
Germany 2.7 63.2 1.4 5.6 Neg /Yes
Great Britain 1.9 53.4 1.8 7.0 Pos / No
Greece 4.0 108.7 5.2 9.8 Neg / No
Ireland -0.9 66.3 1.2 6.2 Neg /Yes
Italy 2.7 121.6 1.8 6.7 Neg /Yes
Luxembourg -1.7 6.7 1.4 5.6 Pos / Yes
Netherlands 1.4 72.1 1.8 5.5 Neg /Yes
Portugal 2.5 62.0 1.8 6.2 Neg /Yes
Spain 2.6 68.8 1.9 6.3 Neg /Yes
Sweden 0.8 76.6 1.8 7.0 Neg / No
Slovenia (2000) 1.4 25.3 8.9 7.8
Source: European Commission quoted in Ferfi la and Phillips, 1999, pp 279-80; Bank of Slovenia, Monthly Bulletin, August
2002. * (-) denotes a budget surplus. **Neg means does not meet one or more of the Maastricht Criteria. Pos means
meets all Maastricht Criteria.
Slovenia is much less favoured with regard to the stability of the Tolar both on the
domestic market and in foreign exchange. These are the two macroeconomic variables
where Slovenia has failed to achieve intended goals. In 1996 Slovenia realized, for the fi rst
time, less than double digit infl ation at 9.9 % and this has fallen further to 8.4 % in 2001.
However, this still exceeds by more than double the Maastricht requirement of 3.2%.
While the rate is expected to decline slowly, it still averaged 7.7 % in the fi rst 8 months of
2002, remaining well in excess of the European goal. Greece, Finland, Spain and Ireland
among the EU countries exceeded the 3 % criteria in 2000 but, with the exception of Ireland,
by well under a half a per cent. Only Ireland with an infl ation rate of 5.6 per cent in
2000 came anywhere near the comparable Slovenian rate of 8.9 per cent. There is a similar,
but less divergent situation with long term interest rates. Long term rates declined to
558

Table 2.10
Performance Indicators: Ten Candidates for EU Entry 2000
GDP Growth Rate GDP per capita Infl ation Unemployment
% Euros PPS % %
Poland 4.0 8,700 10.1 16.1
The Czech Republic 4.8 13,500 3.9 8.8
Slovakia 2.2 10,800 12.1 18.6
Hungary 5.2 11,700 10.0 6.4
Estonia 6.9 8,500 3.9 13.7
Latvia 6.6 6,600 2.6 14.6
Lithuania 3.3 6,600 0.9 16.0
Cyprus 2.0 18,500 4.9 3.4
Malta 5.0 11,900 2.4 4.5
Slovenia 4.6 16,100 8.9 7.0
Source: European Commission, Enlargement Strategy Paper 2001, pp. 66-67.
7.4 % in 1999 continuing the steady downward path since the peak of over 27 % in 1992;
but since 1999 the rate has risen slightly to 7.8 % in 2001. As a result of the monetary situation
and infl ation, the nominal exchange rate of the Slovenian Tolar has not been stable,
and by 2001 had depreciated by over a half from its 1992 benchmark.
On the other hand Slovenia is more favourably placed than most among the group
of countries, mainly central European, that have applied for accession to the EU in 2004.
Some measures of relative economic performance are given in table 2.10 indicating the
generally favourable relative position of Slovenia. Furthermore, Slovenia has been ranked
the highest of the transitional economies in terms of political freedom and liberalization
[Enterprise in Transition, 1997, 15].
The fi rst judgement on Slovenia’s conformity with EU standards was that of the
European Commission which concluded in its 1997 opinion on Slovenia’s application
for membership that the country had the political institutions and competitive market
economy to join but that there were still some considerable changes in legislation and
policies, particularly on in the area of international market liberalization, administrative
reforms, the environment, employment and energy that would be required to meet the
acquis, the EU obligations of membership. [European Commission, 1997, 81-82].
Negotiations between Slovenia and the European Commission for full membership
in the EU began offi cially on March 31, 1998 with the submission of the Slovenian Government’s
National Programme for the Adoption of the Acquis Communautaire (NPAA),
a document that set out the proposed policy directions and legislative measures that
Slovenia intended to take to bring it into conformity with EU requirements. The four
policy areas included in the NPAA included monetary, fi scal, income and international
economic relations prefaced on the assumption that Slovenia would be accepted into the
Union in 2002 [Mirror, April 1998, 4-5]. However, entry to the EU was delayed and is set
now for 2004. In May 2001, Slovenia presented a revised NPAA to the European Commission
to meet the remaining obstacles to accession primarily covering areas such as infl ation,
labour market ‘fl exibility,’ regional policy, privatization of banking, liberalization of
capital movements and other neoliberal, capitalist market ‘reforms’ [European Commission,
Regular Report 2001: Slovenia, pp. 88-90]. These measures, however, may threaten
the social harmony and the macroeconomic performance of the country, a prospect we
will return to in the last chapter.
559

560

561

562

CHAPTER 3
THE TRANSFORMATION OF INSTITUTIONS: THE
DEVELOPMENT OF CORPORATISM
IN SLOVENIA
Beginning in the early 1950s, after its break with Stalin and the Soviet Union, the
former Yugoslavia began a four decade-long experiment in socialist self-management.
It was to be an alternative to the state socialism of the Soviet Union and to the market
capitalism of western Europe and North America which we have called »the third
way?« [Phillips and Ferfi la (1992)] The key institutions in the system were social property
(the social ownership of enterprises) and worker self-management (management
of the enterprises by the employees working in them.) 1 Economists and other social
scientists have debated the merits of the self-management system and whether, or not,
it was a major factor in the economic crisis that ultimately resulted not only in the
abandonment of the system, but also the breakup of Yugoslavia itself. But, whatever
the judgement of the social scientists, there is ample evidence that self-management
was popular with the workers, at least in the economically more successful Slovenia.
The transition from socialist self-management to a capitalist market system in the
1990s took the form of »privatizing« social capital and replacing worker self-management
with capitalist style management. However, both the method of privatization and the replacement
for self-management recognized, at least in part, the popularity of worker participation
in management and the workers« sense of »ownership« of productive capital.
Thus, privatization included both the distribution of shares to the workers and, in many
cases, the opportunity for the workers to increase their ownership share through internal
buyout at preferential rates. Furthermore, some participation in management was guaranteed
by the introduction of a co-determination law patterned on the longstanding German
industrial relations system. And fi nally, the transformation of the unions into strong
collective bargaining agents at the national, branch and local level, further injected a
form of participation in the determination of labour-management economic relations.
The fi rst section of this chapter will describe briefl y the form of the transformation
of property relations; the system of co-determination adopted to replace the institutions
of self-management; and the evolution of the formal corporatist institutions of the social
contract and the centralized and comprehensive industrial relations system.
The second, substantive section reports the results of our surveys of the extent to
which the new system of co-determination and worker participation has been implemented
and become operational, and with some evaluation of its effectiveness. This tentative
evaluation is compared with Stanojević's conclusion based on case studies of fi ve
major Slovene companies. [Stanojević (2000)]
Finally, we provide a brief comment on the future prospects of the system with particular
reference to the proposed entry of Slovenia into the European Union.
1 For a fuller discussion of these institutions see Paul Phillips, “Social Property and Social
Ownership” and “Participatory Democracy and Self-Management, in the Encyclopaedia of Political
Economy?” (London: Routledge, 1999)
563

564
THE TRANSFORMATION OF OWNERSHIP
Western economists have usually argued that sustained recovery and continued real
economic growth in the former communist countries depended on the transforming of
property relationships. However, there is little convincing evidence that existing property
relationships in Slovenia were either a signifi cant cause of the economic depression of the
early 1990s or were a barrier to recovery and restructuring. After all, with exports comprising
60 per cent of Slovenia«s GDP, the collapse of the former Yugoslav, Soviet Union
and eastern European markets, international monetarism and the recession in western
European markets were more than suffi cient to explain the severity of the post-1991 depression.
Further, the process of restructuring was well under way before any signifi cant
privatization of social capital. Furthermore, the level of unemployment that developed in
the depression and subsequent restructuring remained below the European Union average
when measured by the common ILO defi nition of unemployment. In the late 1990s, most
of the major private property economies of the EU had unemployment rates two or more
per cent higher than Slovenia«s. Only in Austria, Sweden, Portugal, Luxembourg and the
Netherlands were jobless rates signifi cantly lower than in Slovenia.
Nevertheless, the focus of much public debate was the question of ownership transformation.
In fact, the pace of privatization in Slovenia initially was quite slow. As late
as the middle of 1993, three quarters of employees and almost two thirds of output was
accounted for by the social property sector. In 1994, two thirds of gross investment continued
to be undertaken by the social sector. By mid-1993 only slightly more than 10 per
cent of the listed 400 major social enterprises had passed into private hands. The private
sector did have rapid growth, but primarily through the explosion in the number of small
businesses in the service industries (a pattern similar to that in western Europe and
North America) rather than through the transformation of social property.
The reason for the slow pace of restructuring property relations was partly political and
partly economic. The economic crisis of the early 1990s was not the appropriate time to
initiate a major property transformation that would reduce the number of jobs as a result of
bankruptcy, privatization and downsizing. But this was no doubt much less important than
the political debate that developed over the form and mechanism of privatization. On the
one side were the proponents of rapid privatization advocated by American »free-market«
economists and adopted by the governing Christian Democratic Party coalition – nationalization
of socially owned enterprises and distribution of stocks to all residents – and those
who favoured the slow route, primarily by internal buyouts of socially-owned enterprises
by workers and managers, advocated by the Vice-prime Minister for the economy, Joze
Mencinger. A public opinion poll taken in early 1992 strongly supported the slow route. A
quarter of respondents opposed all privatization while a further 40 per cent believed that
social property should be distributed to the workers and managers that operated the enterprises.
Only 20 per cent supported sale to the highest bidder.
What in effect was a compromise route became law when Parliament passed the Law
on the Transformation of Company Ownership, which came into effect in April of 1993.
The basic method involved a number of elements with each enterprise free, within certain
limits, to choose the most appropriate route:
1. Transfer of 40 per cent of shares to state controlled fi nancial funds (Compensation
Fund, Pension Fund, Development Fund) for later sale to newly-created investment
funds;

2. Free distribution of 20 per cent of shares or ownership certifi cates to employees,
former employees or their relatives;
3. Internal sale to employees of up to 40 per cent of shares at a discount of 50 per
cent;
4. Public sale of shares or sale of entire companies in the case of bankruptcies with
proceeds paid to the funds; and
5. Ownership transformation by the issue of new shares in value greater than 30 per
cent of existing equity to retire debt or fi nance new investment.
Some critics argued that the law did not ensure Areal privatization@ because the
process encouraged most fi rms to be bought out internally by employees, resulting in
60 per cent employee control with the state funds retaining the rest. Given the specifi ed
time limits on resale of distributed shares, it would take years before a secondary market
developed and concentrated private share ownership. Indeed, that is exactly what
happened with over 90 per cent of socially-owned companies opting for privatization
through internal buy-out by mid-1995, while most of those which did not opt for internal
buy-outs were those that were making heavy losses and remained as state-owned fi rms.
However, this was not the problem that these critics assumed. The relative success of
self-managed enterprises, particularly in Slovenia, and the increasing domination of institutional
ownership in other western capitalist economies casts serious doubt on any
direct connection between private ownership and economic effi ciency independent on
the importance of managerial responsibility and effi ciency.
Other critics pointed out that the legislation failed to promote the major aim of privatization,
the injection of new capital into Slovenian enterprises. Many of the transitional
economies, including Slovenia, had placed much faith in attracting injections of foreign
capital. However, direct investment raises serious problems, including the danger that
Slovenia would lose control over its own economy in the process and increase its vulnerability
to currency speculation. However, enthusiasm for foreign participation has waned
considerably more recently. Of the more than 1500 privatization programs received by
the Slovenian Agency for Reconstruction and Privatization by April 1995, only three involved
foreign participation. [ARP (1995) p. 4]. Further, in 1997 the Bank of Slovenia
brought in measures to curb foreign capital infl ows in an attempt to dampen infl ationary
pressures.
Indeed, the dominance of the internal buy-out, the apparent residual support for
the old self-management system, the lack of any large pools of private capital, and the
worker participation in management legislation (Participation of Workers in Management
Act) has led some business interests to lament that the system has not really changed. As
one commentator wrote:
... the main reason for the attractiveness of internal subscription lies basically in
the sense of commitment that employees have to »their« enterprises. Obviously the
majority of employed Slovenian citizens consent to a property structure which assures
the continuation of the exiting management structure without introducing any major
change. [Petrov (1995) 21]
Though Petrov overstates the case, the combination of co-determination and a corporatist
industrial relations structure introduced by the Slovenian government under pressure
from workers and their unions, constitutes part of the legacy of the previous system
of socialist self-management.
565

566
CO-DETERMINATION
Co-determination (or Mitbestimmung in German) is the system pioneered in Germany
after the Second World War that introduces a measure of worker participation
into enterprise management by legislation. The Slovenian version was introduced in
1993 through the Law Regarding the Participation of Employees and applies to employees in
all economic enterprises regardless of type, including co-operative societies (Article 1). 2
The law provides for the following institutions in each enterprise: Works (or Workers«)
Council and Shop Steward; a General (workers's) Assembly; a Supervisory Board; and,
for large fi rms, a Work (personnel) Director on the enterprise« Executive Board who is
nominated by the Works Council. What are the composition, powers and competencies
of these various institutions?
Works Council and Shop Steward: The law provides that employees in all enterprises
with more than 20 employees have the right to elect a works council. In smaller enterprises,
the workers may elect a shop steward who has the same powers as a works council.
The powers of the works council or shop steward are rather limited. They are primarily
those of consultation, of making suggestions and of receiving information including,
among other things, data on the fi nancial, economic and sales situation, and notice of
projected changes in output, technology, and employment. Employers must consult with
the works council about any change in the status of the company (including sale of all or
part of the company) and on personnel matters.
However, on some matters the works council does have »co-determination« powers;
that is, power to effectively veto a management decision – worker health and safety provisions,
rules regarding vacations, performance criteria, funds for housing and vacation
arrangements, and criteria for promotions (Article 95). The works council can also block
sale of all or part of a company, technological change or reorganization that involves a
signifi cant reduction in staff if no provision is made for solving the labour adjustments
that the proposal requires, or if »the proposal itself is without foundation.« (Article 96)
Furthermore, the works council appoints employee representatives to the Supervisory
Board, and may also negotiate agreements with the employer governing matters
beyond those specifi cally mandated in the legislation but must not interfere with the
activities of unions in the same workplace.
The General Assembly: The general assembly is effectively a works council of all employees
and has the same competencies as the works council. It may be called by the
works council or following a request from management where management wants particular
concerns or matters considered by the whole body of workers.
The Supervisory Board: The effective management policy body of an enterprise is its
Supervisory Board which is distinct from the management executive body, the Executive
Board. The supervisory board is considered to be the most important decision making organ
of management. At least one third of supervisory board members must be employee
representatives elected by the works council in fi rms of up to 1,000 employers, and one
half in fi rms with more than 1,000 employees. Bylaws of individual enterprises may provide
for a higher proportion of employees on the supervisory board but not less.
The Work, or Personnel, Director: The law provides (Article 81) that fi rms with more
than 500 employees must have a Work Director on the Executive Board who is nominated
2 This discussion is based on a translation of a German version of the Slovenian law by the late
Professor Roy Vogt of the University of Manitoba.

y the works council. In fi rms with less than 500 employees such a work director may
be appointed by agreement between the employer and the works council. The role of the
work director on the executive board is to »represent the interests of employees in relation
to their personal and social needs.« (Article 84)
Thus the Law Regarding the Participation of Employees provides specifi c machinery
for worker participation in management, effectively through two institutions – at the
work place level, the works council; at the management level, the supervisory board.
However, it must be recognized that the powers of the works council are largely consultative
only, while employees will normally not command a majority on supervisory boards.
Except where fi rms have been bought out by the workers, therefore, co-determination is a
long way from self-management as it was, at least in theory, practiced in the old system.
SOCIAL CONTRACT AND COLLECTIVE AGREEMENTS
The transition process and the change in institutions of ownership and management
from one based on worker self-management to one based on management by, and for,
capital involved a fundamental change in the functioning of the labour market. Under
self-management open unemployment was rare as enterprises, under pressure from
both workers and political offi cials, tended to retain redundant (underemployed) labour,
frequently with fi nancial assistance from the state and local authorities. As Svetlik has
noted, however, as a result of the radical reforms in Yugoslavia which began in 1989,
»thousands of individuals, who had perhaps never thought about unemployment before,
experienced it after the reform(s)....« [Svetlik (1997) p. 218] This was made more severe
by the depression following independence and the loss of the Yugoslav and eastern European
markets with unemployment peaking at over nine per cent (ILO defi nition) in
1993. Unemployment was also exacerbated by the opening up of the market economy to
competition forcing fi rms to reduce labour employment and to introduce labour saving
technological, organizational and structural changes. [Svetlik (1997) p. 219]
One result of the economic crisis and the consequent unemployment, wage declines
and an uncertain economic future was labour unrest, including a threatened general
strike. [Luksic (1996) p. 191] This was compounded by disunity within the ranks of the
unions as a result of political divisions originating in the transition from a uniparty to
a multiparty state prior to independence. The traditional communist unions which had
previously had the role of guaranteeing workers rights under the self-management system
and of providing social and recreational services and facilities for the workers, faced
not only a totally new role C representing labour not only as workers in their branches
and enterprises, but also as a class in relations with capital and the state C but also competition
from new unions mainly associated with the new right-wing parties which made
up the governing coalition grouping, DEMOS, after the 1990 election. The result was a
proliferation of union bodies that weakened labour with respect not only to the employers
but also to the state.
The Ministry of Labour attempted to establish a tripartite ( Chamber of Commerce,
Unions, Ministry) consultative body in 1990, the Council for Employment, to deal with
the emerging economic problems, particularly unemployment, infl ation and rising wages,
but it was largely ignored by the government. This led to demands from labour for a
permanent, institutionalized tripartite body that would include government and would
567

deal with all aspects of economic and social policy, a model that was to some extent patterned
on the system in neighbouring Austria. The DEMOS government, however, was
opposed and, as Luksic notes, “weak government, feeble Trade Unions, and unacknowledgement
of the (legitimacy of the) Chamber of Commerce” prevented its formation.
[Luksic (1996) pp.192-193]
However, in 1992 a much stronger Liberal government was elected, the union movement
consolidated 3 (though still split between four signifi cant peak labour bodies) and,
in 1994, the establishment of the Employers« Association of Slovenia, gave new impetus
to the creation of a permanent corporatist institution. Under pressure from the unions,
particularly the dominant Confederation of Free Trade Unions of Slovenia (ZSSS, the
reformed former communist federation) which encompassed half or more of union members
in Slovenia, the tripartite Economic and Social Council was established in 1994,
though only after protracted opposition from the governing Liberals who were least favourable
to the idea of a social partnership that would constrain unilateral government
powers. [Luksic (1996) p. 202] Nevertheless, the following spring a fi rst social agreement
was signed by all parties covering »employment, wages social security, pensions, prices,
taxes and contributions, interest rates and exchange rate (policies).« 4 [Luksic (1996) pp.
196-200; Stanojevic (1997) p. 1] During the 1st decade of indenpendence, other (annual)
Social agreements have been negotiated though only the 1995-6 agreements were general
agreements. The others maintained the original general agreements with the addition
of incomes policies establishing new levels of wages and benefi ts. Stanojevic points out
that tripartite agreements are strongly supported in Slovenia, by almost 90 per cent of
the population [Stanojevic (1997) 8]; 5 while Luksic suggests that this support for social
agreements is related to a positive evaluation of the social compacts and self-management
agreements of the previous socialist system. [Luksic (1996) p. 191] In any case, the
establishment of the social partnership through the agency of the social agreements has
been credited with producing positive social, political and, in particular, macroeconomic
results. [Luksic (1996) p. 203]
Within the umbrella of the Social Agreements are the national, branch and enterprise
collective agreements between the trade unions and the appropriate management bodies
under the Law on Labour Relations, passed in 1990 and revised in 1991 and 1993. The national
agreement sets out contractual minimums of wages and working conditions applicable
to all employees in the country. The Branch (industry) agreements, of which there
were 33 in 1998 [ZSSS (1998) p. 80], are the most important set of agreements in that they
establish minimum conditions in each branch which are normally above those set out in
the national agreement 6 and also provide for conditions benefi ts specifi c to the industry.
3 Despite the divisions within the union movement, the degree of unionization in Slovenia is
quite high, even by European standards, at around 60 per cent. [Stanojevic (1997) p. 4]
4 The 1996 Social Agreement includes the following sections: 5.1 Implementation Measures for
structural changes; 5.2 Employment goals; 5.3 Price goals; 5.4 Taxes and Contributions, Expenditure
and National Budget goals; 5.5 Salary targets; 5.6 Social Security and Social Insurance harmonization;
6 Legal Security measures; 7-10 Dispute settlement machinery, Monitoring procedure and
Length of agreement (1 year).
5 Slovenian support for tripartism is contrasted to Croatia where 60 % of those surveyed rejected
social partnership.(Stanojevic (1997) 8, quoting Paul Lazaarfeld Society, 1996)
6 For instance, in the January 1, 1998 agreement for workers in the chemical and rubber industry,
the starting wage was a minimum of 6% higher than the average starting wage established in
the June 1997 general agreement.
568

Enterprise agreements, where they exist, tailor the Branch agreement to suit the particular
economic and working conditions of a specifi c enterprise. It should be noted that the
enterprise collective agreement may not restrict or impose upon the competencies of the
works councils as described above.
WORKER PARTICIPATION IN PRACTICE: EMPIRICAL STUDIES
In the latter half of the nineties, complaints began to be heard from managers that,
despite the transformation of property from social ownership to private or state ownership
and the abolition of self-management, little had really changed in management
of enterprises and that workers continued to cling to self-management practices. Other
complaints were heard about the transformation process itself – that the process did not
supply any new investment capital and that the state and investment funds were interested
only in extracting profi ts and not in the future of the enterprises.
To investigate these matters a questionnaire was administered to managers and union
offi cials at some 107 employers in Slovenia in the fall of 1997. The purpose of the
questionnaire was to see to what extent participatory machinery was in place, whether
the transformation had produced major changes in management practice and worker
benefi ts, whether workers did experience a signifi cant loss in decision-making powers,
and whether workers and managers thought the process of privatization was equitable
and effi cient. Further information was gained on individual fi rms relating to industry,
employment by education level, profi tability, and ownership structure.
The results of the survey would seem to give some support to the following conclusions.
First, the co-determination machinery has been widely adopted and is functioning
as intended. Second, workers do feel they have lost signifi cant power to managers but,
perhaps surprisingly, there appears to have been no great changes in management practice
and in wage and benefi t outcomes. Third, one of the prime factors contributing to the
continuity of wages and benefi ts are the unions and the collective agreements that have
emerged as the major factor in determining wages and working conditions. Fourth, as
perhaps should be expected, worker buyouts, higher and more effective worker participation,
and profi tability appear to be associated with higher educated workforces though
the exact relationship appears complex and the direction of causation between these
variables is not clear. Let us review the evidence as provided by our survey. The fi rst data,
Table 3.1, give an overall description of the enterprises, their labour force characteristics,
and their ownership and profi tability characteristics. Table 3.2 describes the extent and
distribution of worker participation and other measures of co-determination.
Of those fi rms that reported very negative results for 1997, almost all (7) were in the
»old« or »heavy, traditional« manufacturing sector, such as shoemaking, steel and metal,
chemicals and window and door manufacturing. Several of these were still undergoing
restructuring and remained under state ownership or were in the process of »privatizing«
at the time of the survey.
The other heavy losers (2), as one might expect, were accounted for by the railway
system and a tourist destination badly hit by the decline in tourism. In contrast, the most
profi table fi rms were in the newer, higher technology, manufacturing sectors (6) such
as pharmaceuticals and electrical products and paper and publishing; and in trade (5),
particularly in the import/export segment.
569

Table 3.1
Enterprises by Average Size, and Employee, Ownership and Profi tability Characteristics*
Enterprises and Employees Covered
Number of Enterprises 107
Total Employees 74,040
Average Employees/Enterprise 692
Education of Employees:
% of employees with Elementary High School Post Secondary
& Certifi cate & Post Graduate
Average 30% 52% 17%
Ownership Structure of Enterprises
% of shares held by Funds Internal (employee) Other
Ownership (Incl. State)
Average 27% 37% 35%
Profi tability of Enterprises
% of Enterprises that were
in the most recent year** Very Profi t Break Very High
Profi table -able Even Losses Losses
14% 59% 10% 9% 9%
**Two enterprises did not report results; excludes 1 state enterprise which reported it was »on budget«.
* Percentages may not add up to 100 due to rounding.
Generally speaking, the lowest rate of profi table and very profi table fi rms were found
in manufacturing and transportation and communications, the highest in utilities, fi -
nance and insurance, with slightly lower rates in construction and trade.
From Tables 2 and 3 it is obvious that the vast majority of fi rms and departments
had established the requisite institutions of co-determination. Those that had not were
generally state enterprises or departments, were still in the process of restructuring or
undergoing privatization, or had developed other forms of worker participation including
union representative institutions.
Table 3.2
Institutions and Worker Participation
Institutions
% of Enterprises with: Supervisory Works Work
Board* Council** Director Union***
91 74 9 93
*Of those without supervisory boards, 20% (2) were majority owned by the workers themselves and 40% (4) were state
enterprises or departments. Some were also still in the process of restructuring and rehabilitation. At least one was a wholly
owned subsidiary of a larger enterprise with a supervisory board and workers council.
**Of the 23 without works councils, well over half (56%) were state enterprises or departments, undergoing restructuring,
or majority owned by workers. In at least two other cases, the council function was reportedly taken by the union and in one
or two other cases, informal advisory councils fulfi lled the role.
***Of the six enterprises that reported no union, four were majority owned by the employees.
570

Worker Participation
% of Enterprises with Supervisory Boards by % of Workers on Supervisory Boards
Number of Enterprises with Supervisory Boards:
Reporting Composition of those Boards: 88
Not Reporting Composition of Boards: 9
Distribution of Reporting Enterprises by % of Employee Representation on Boards:

Fin., Insur. & Real Estate 50.0 not applicable 20.0 80.0
Tourism and Rec. 100.0 35.8 25.0 100.0
Manufacturing 92.2 33.7 81.4 96.1
Not Specifi ed 33.3 11.1 66.7 66.7
Total 90.7 34.3 73.8 93.5
Participation by industry group is reported in Table 3.3. With the exception of the Finance,
Insurance and Real Estate sector, it is obvious that participatory institutions have
been widely adopted. However, the most pervasive institution in all sectors is unionism,
indicative of the importance unions have been in the transition process and in contemporary
industrial relations.
Subsequent surveys of management structures conducted in 1998-99 and 2000-01 indicate
that, though there may be some erosion of co-determination institutions, particularly
in recently established fi rms, the general pattern of participation and ownership has
been maintained (see Appendix 3). An exhaustive statistical analysis of the 1999 survey
failed to fi nd any statistically signifi cant relationship between ownership and participation
status and profi tability, confi rming the results of the original 1997 survey.
The evidence of widespread adoption of participatory institutions, however, does
not answer the important questions of whether the transformation of property relations
and the adoption of a corporatist industrial relations system has fundamentally changed
relations of power in the workplace, whether workers retain any proprietary and selfmanagement
interests, and whether privatization through a high degree of worker ownership
has contributed to the relative success of Slovenia«s recovery from the economic
depression caused by separation from Yugoslavia, the collapse of export markets and the
transformation to an open-market system.
572
THE IMPACTS OF THE TRANSFORMATION OF PROPERTY
RELATIONS AND THE ADOPTION OF CORPORATISM
It is diffi cult to quantify and evaluate the results of the survey questions on changes in
management and the role of workers in management; and on the impact of those changes
on employee wages, benefi ts, and working conditions. What is clear is that, while worker
infl uence through the co-determination machinery is less than it was under self-management,
the actual changes in practice have been relatively limited. It was noted frequently,
for instance, that the works councils had little of the powers of the preceding self-management
councils, their role other than in the appointment of worker representatives to the supervisory
board, being largely consultative and advisory. However, the support and muscle
of the trade unions have given the works councils greater infl uence than exists on paper.
In perhaps the majority of cases, the union offi cials argued that managers had too much
power but in many cases also admitted that they (the managers) did not misuse that power.
At the same time a number of managers reported that consultation and co-operation with
the workers was necessary to the effi cient functioning of the enterprise.
The majority of questionnaires reported that wages and benefi ts had not changed much
but this was credited to the collective agreements negotiated by the unions. A minority
reported attempts by management to reduce benefi ts, as often as not unsuccessful due to
union resistance, and several reported that real wages had declined due to price increases
exceeding wage increases in the collective agreement. The most frequent complaint from

union offi cials were layoffs and threats of layoffs due to restructuring and rehabilitation of
some of the bigger, money-losing enterprises.
What is clear from the responses is that the power to determine wages and benefi ts
has shifted from self-management organs to collective bargaining between the unions
and management. Even where the works councils and supervisory boards have strong
worker participation and infl uence on management decision making, there is evidence
that the unions are closely involved in the works councils and in the selection of members
of the supervisory boards.
Perhaps the general view of the overall impact of the transformation can be summed
up by this quotation from a composite summary of the views of a manager and a trade
union offi cial of a large and prominent Slovenian fi rm:
Not much change. Management the same. Now a supervisory board instead of a decision
making board. Infl uence of workers is through the collective agreement. Better
salaries and work. Wages and fringe benefi ts based on results, profi t sharing through
dividends. Management says workers do not have too much power though they believe
unions think managers have too much power. There is an internal newspaper which
keeps all workers well informed. The process of privatization was too long and too costly,
involving management in the process and not attending to business. But workers ended
up with a good share of ownership (65% when all the reserved stock is distributed) and
management admitted it was good to have the workers involved.
Generally, therefore, it is suggested that where the fi rms were profi table and where
workers got a good share of ownership, the predominant evaluation is that Anot much
had changed.
As previously noted with respect to the debate over privatization, many Yugoslav
economists had argued that one of the causes of the economic crisis that had plagued the
country in the 1980s was »social ownership« of productive property and that a necessary
precondition of recovery and sustained growth was a transformation of property rights
from social to private (capitalist) ownership. As Vahcic has written, the purist model
based on the free market private enterprise ideology would require that the majority
ownership of corporations should be in the hands of outside owners. [Vahcic (1997) p.
235] There is, however, no evidence in this study to support this purist view. Recovery
and sustained growth had taken place long before property relations were changed and
there was no statistical relationship found among the surveyed fi rms between ownership
and profi ts after privatization. On the other hand there was also not much support for
the alternate point of view, that worker ownership should motivate workers to produce
higher productivity and profi tability. 8 Regressions were run between worker (internal)
ownership and profi tability and, although the coeffi cient was positive (which would support
the alternative view), it was not statistically signifi cant. 9 Interestingly, what was statistically
signifi cant were the relationships between the percentage of workers with postsecondary
education and both worker ownership and profi tability.
How to interpret these results is not entirely clear though they are consistent with
the hypotheses that more highly educated workers are more interested in controlling
their workplaces; and that newer, higher technology industries and those that use more
»human capital« tend to be more profi table. However, none of the evidence supports the
8 This conclusion coincides with that of most other studies of workplace democracy and economic
effi ciency. See Vahcic (1997) pp. 237-238.
9 Regressions were run using both OLS and Ordered Probit methodologies, with a similar result.
573

contention that transforming property relations was a necessary condition of promoting
successful economic growth, at least in the fi rst half-decade of growth following the initial
post-independence depression. 10
574
CASE STUDIES
Stanojevic has also explored the transition to co-determination and the resulting relationship
between workers and management in case studies of fi ve Slovenian companies
conducted through extensive in-depth interviews. [Stanojevic (1999)] His conclusions, by
and large, are similar to ours, in particular the importance of unions in perpetuating the
self-management legacy. Stanojevic, indeed, places primary responsibility for the preservation
of many of the aspects of former self-management on the unions.
Under the pressure of the contextual changes, self-management has been transformed
to co-determination on one hand, and trade union representation with the
enterprises, on the other. Trade union representation was the key factor, which neutralised
huge external pressures on employees and kept the power balance within the
organizations. It is possible to say that trade union power has enabled employee participation
in Slovenian enterprises. Without the trade unions, participation would have
probably disappeared.
More indirect change of the external pressures has been rooted in employee
ownership.... the self-management tradition offers an acceptable explanation of the
Slovenian peculiarities again. Self-management stimulated the self-interest of workers
collectives within the socially owned fi rms in market socialism. In accordance
with the tradition, employees understood enterprises as organisations »of their own«.
»Company unionism« strongly supports, and also creates, this understanding. [Stanojevic
(1999) pp. 23-24]
Thus, this suggests that the emergence of a strong unionism is key to understanding
the continuation of both the institutions and practices of worker participation in management.
The experience of self-management fostered a culture of participation that found
its advocate and defender in the unions, particularly those associated with the ZSSS. This
participatory culture has subsequently been incorporated in what the German Christian
Democrats have labelled the social market, a regulated labour market which included the
corporatist industrial relations system and practice that has developed in Slovenia over
the last decade. The question is, will this legacy of self-management continue or will it
gradually fade away
THE PROSPECTS
While change may have been limited over the fi rst years following the transformation
of ownership and the adoption of co-determination, what are the prospects for the
longer run? There are three forces that have the potential of eroding the participation
10 Vahcic in his review of economies in transition also found »that the privatization of state
owned enterprises obviously is not the necessary condition for successful growth in transition
economies.« [Vahcic (1997) pp. 234-235]

institutions and attitudes that we have suggested are the legacy of self-management.
One is the dissipation of worker ownership over time as shares become tradeable and
as workers age and retire. As the economic literature on worker co-operatives suggests,
individual worker ownership of shares leads eventually to the decay of co-operatives into
ordinary capitalist fi rms. Therefore, to the extent that worker participation today refl ects
the degree of worker ownership, the decay of that ownership can be expected to lead to
a commensurate reduction in participation.
The second threat comes from the aging and inevitable turnover of the union leadership,
in particular those leaders who had the experience of self-management and who
had absorbed the culture of participation. A new generation of leaders may not have the
same familiarity with, and commitment to, participation in management that appears to
have motivated the current union leadership.
The third, and perhaps most serious, threat comes from projected membership in
the European Union. One of the remarkable aspects of the Slovenian transformation is
the degree to which it was accomplished without reliance on foreign capital. While some
economists and managers lament the lack of foreign capital infl ow to provide injections
of capital and technology in some ailing, capital-poor industries, the experience in many
other countries is that such capital infl ows have proven destabilizing, driving up exchange
rates, discouraging the development of domestic industries and, in some cases, resulting
in the looting and export of the existing capital stock. However, Slovenia has been
required to ease its restrictions on foreign capital infl ow in order to meet EU standards.
Any infl ux of foreign fi rms that is encouraged by this (except perhaps for German fi rms)
will reduce the percentage of fi rms in Slovenia with an historic and political commitment
to worker participation in management as well as reducing the proportion of worker
share ownership. Furthermore, European Commission reports on Slovenia«s compliance
with the acquis, the requirement for accession to the EU, have noted the »need« for more
labour market »fl exibility«, which in this context is a euphemism for reducing the infl uence
of unions and the regulatory power of the industrial relations system. [European
Commission (2001) Regular Report: Slovenia, p. 88]
If this is a correct analysis, should we expect to see a continuous slide toward more
traditional, authoritarian management in Slovenia? Perhaps the answer to this lies with
the Slovenian unions. If they are able to maintain and give teeth to the participatory
institutions and retain their density of coverage, we may expect that the legacy of selfmanagement
will be felt in Slovenia for some time. However, these are issues that we will
take up in more detail in chapters 5 and 6.
575

576
APPENDIX 3
Worker Ownership and Participation in Management 1998-2001
1998-99
Industry Number of fi rms % Worker % Private % Foreign Supervisory % Workers on Works
surveyed ownership ownership** ownership Board Supervisory Bd. Council
Primary 3 0.0 0.0 0.0 66.7 33.3 33.3
Construction 7 31.3 30.1 0.0 85.7 37.5 28.6
Trade 33 18.0 34.3 9.3 78.1 36.1 56.3
Trans & Comm. 9 14.4 46.0 0.0 55.6 42.7 55.6
F.I.R.E* 12 4.8 48.8 0.0 54.5 20.1 36.4
Tourism & Rec. 5 25.1 36.6 0.0 80.0 23.9 40.0
Manufacturing
Services:
63 20.0 34.7 11.5 77.6 38.3 63.8
Commercial 8 14.3 42.7 14.3 42.9 20.4 28.6
Public 11 0.0 0.0 0.0 25.0 43.0 16.7
Consumer 2 13.0 50.0 0.0 50.0 40.0 50.0
Average/Total 153 14.1 32.3 3.6 61.6 33.5 40.9
2000-01***
Industry Number of fi rms % Worker % Private % Foreign Supervisory % Workers on Works
surveyed ownership ownership** ownership Board Supervisory Bd. Council
Primary 1 0.0 0.0 0.0 0.0 0.0 0.0
Construction 1 0.0 100.0 0.0 0.0 0.0 0.0
Trade 14 14.7 27.5 3.1 42.9 39.2 14.3
Trans & Comm. 6 0.0 33.3 0.0 33.3 38.5 33.3
F.I.R.E* 4 0.0 25.0 67.0 50.0 na 0.0
Tourism & Rec. 1 0.0 100.0 0.0 0.0 0.0 0.0
Manufacturing
Services:
19 36.0 12.7 5.3 79.0 32.8 57.9
Commercial 10 27.0 44.5 1.5 30.0 13.0 40.0
Public 82 0.0 0.4 0.0 23.2 33.6 43.9
Consumer 3 33.3 33.3 0.0 0.0 0.0 0.0
Average
na « not available
141 8.2*** 13.5 3.0 25.8 32.0 18.9
*Finance, Insurance and Real Estate
** Excludes Investment Funds, Foreign, State and Co-operative Ownership
***Note that the 2000-01 survey concentrated on public services, in particular educational institutions (schools). This
skews the averages of worker ownership downward. However, the public institutions do have a developed participation
structure.

CHAPTER 4
MONETARY AND EXCHANGE RATE POLICY DURING
SLOVENIA'S TRANSITION
INTRODUCTION
The economic crisis in Yugoslavia at the end of the 1980s, Slovenia=s abrupt departure
from the disintegrating Balkan federation in mid-1991, and the new republic=s commitment
to transform its property and market institutions to conform to those of western European
capitalism presented a formidable task for the new and independent Republic of Slovenia in
1991. The immediate tasks, as we have noted previously, was the creation of an independent
national monetary system, restructuring the banking and fi nancial institutions, controlling
hyperinfl ation which peaked at over two hundred per cent in 1992, drastically reorientating
trade away from the collapsing Yugoslav market toward western Europe, raising investment
and combatting sharply rising unemployment as Slovenia proceeded, albeit slowly, to dismantle
its socialist self-management economic system B all without disrupting the somewhat
fragile political system and social harmony. The problems the new country faced, therefore
were both macroeconomic, stabilizing and growing the economy, and microeconomic, restructuring,
reorienting, privatizing and downsizing the industrial economy.
A quick perusal of the Macroeconomic Indicators (Appendix Table 2.1) suggests that,
despite the odds, Slovenia has been relatively successful in turning the economy around.
The sharp transitional depression ended in 1993 and growth since that time has be uninterrupted,
averaging in excess of four per cent (real) over the following eight years. Infl ation
has been reduced from 207 per cent in 1992 to 6.1 per cent in 1999 though there was a
signifi cant increase to 8.9 per cent in 2000 and 8.4 per cent in 2001. Unemployment, measured
by the ILO survey method, peaked in 1993-4 at just over nine per cent and has since
fallen to around 6.4 per cent in 2001, below the average for the European Union (EU), with
employment growth positive since 1997. Real wages have risen strongly since 1993 backed
by productivity gains that averaged just under four per cent between 1993 and 2001. Export
growth in goods and services has largely been positive, particularly in the early years of the
recovery, while the effective exchange rate, defl ated by the price index, has remained stable
and strong, even appreciating moderately. Real interest rates have fallen dramatically, from
over 20 per cent in 1992-3 to the 6-8 per cent range in 2001 though they still remain relatively
high. Throughout the period, the general government budget has remained roughly
in balance with modest defi cits in 2000-2001 of 1.4 per cent of GDP with a total public debt,
mainly debt inherited as its share of the debt of the former Federal Republic of Yugoslavia,
of just over a quarter of GDP and relatively stable..
THE GOAL AND CONSTRAINTS OF MONETARY AND EXCHANGE RATE POLICY
Prime responsibility for macroeconomic stabilization and growth was given to the
new central bank, the Bank of Slovenia (BS), in part because of constitutional limits
placed on the levers of fi scal policy, in part due to the preoccupation with achieving the
577

infl ation and exchange rate criteria set out by the Maastrict Treaty for entry into the EU
and the monetary union (EMU) 1 . The BS=s priorities, reigning in infl ation, isolating the
domestic currency from international fi nancial fl ows, and stabilizing the exchange rate,
were set out in its fi rst Annual Report in 1991 and have been reiterated in varying forms
annually since.
578
In introducing new monetary instruments the fi rst concern was to prevent the
banks= global liquidity from surpassing the level in September 1991. Banks= excess
liquidity then had to be neutralized to avoid infl ationary pressure and thus pressure
to devalue. The creation of foreign exchange reserves inevitably increased banks=
liquidity and this had consequently to be sterilized. Moreover, another objective was
to reduce the level of banks= obligatory reserves at the Bank of Slovenia to a level
comparable to that of other countries, thus bringing down the banking intermediation
costs. [BS, Annual Report 1991, 23]
The fi rst concern was controlling infl ation. As the 1993 Annual Report puts it, Athe
Bank=s clear objective has been to bring infl ation down to the European level with a few
years time.@ [BS, Annual Report 1993, 23] The problem with bringing down the infl ation rate
was two fold, one external and one internal. The external problem was the rapid infl ow of
foreign exchange both as a consequence of a strong current account surplus, but also infl
ows of portfolio investment and, with the sale of social housing to Slovenian residents, the
repatriation to pay for the housing of foreign exchange previously held abroad by Slovenes
as a hedge against domestic currency infl ation. If this infl ow were not to be monetized,
a mechanism had to be developed to sterilize it to prevent an uncontrolled increase in
the money supply. Furthermore, an excessive infl ow of portfolio investment or borrowing
abroad by Slovenian enterprises would serve to drive up the exchange rate which, while
contributing to moderating infl ation, would at the same time discourage exports and encourage
imports thereby forcing up unemployment and making industrial restructuring
more diffi cult.
The internal problem was also multi-faceted. Slovenia had no functioning capital or
fi nancial markets and a banking system that was subsidiary to, and owned by, the major
industrial enterprises who were also the banks= major debtors. In the economic depression
that followed independence and the insolvency of many of these enterprises, the
banks were saddled with an enormous burden of bad debts. Thus it was necessary not
only to separate the banks from the enterprises but also to rehabilitate them through a
mechanism for socializing the enterprises= debts.
The labour market also functioned in a manner quite dissimilar to that of a capitalist labour
market. This was a consequence of the history of workers= self-management which allowed
the hiring of excess labour by enterprises and provided insuffi cient checks on wage
infl ation fi nanced by captive banks. Furthermore, the enterprises themselves were able to
pass on cost increases through prices because of monopolization of the restricted domestic
market by a few large enterprises, in part also a hold over of the socialist self-management
system after 1976 which provided for non-market agreements (self-management agreements)
among the existing enterprises and created barriers to entry of new fi rms which did
not have access to social capital through the captive banking system. However, new capital
1 Slovenia also resorted to price controls that were quite widely used in the early nineties covering
an estimated 50 per cent of commodity sales. As late as 1998 price controls were still applied to
around 30 per cent of sales [Belaisch 2000, 41].

investment to fi nance the restructuring of the economy was inhibited by the high real interest
rates and restrictions on access to foreign capital, designed to restrain infl ation, by the
lack of functioning capital and fi nancial markets, and by very limited infl ows of foreign
direct investment (FDI) due to a number of factors discussed in the next section.
Thus, Slovenian authorities, particular at the BS, were faced with a classic dilemma.
Macroeconomic recovery required the expansion of net export and domestic demand and
economic restructuring and rehabilitation. At the same time, control of infl ation called
for a restrictive monetary policy and a stable exchange rate. Most western economists
advised the standard austerity package including rapid and radical >coupon privatization=,
reliance on FDI, liberalization of capital fl ows and fi nancial markets, and cutbacks
in social services and transfers.
Slovenia, by and large, rejected such advice. Indeed, some leading business offi cials credit
the relative success of macroeconomic policy since independence with the refusal to take
foreign >expert= advice [Hribar Milic (2000)]. The main reasons, we suggest, were political and
institutional. Slovenia has had a history and tradition of egalitarianism and social solidarity
which rejected the rapid growth in inequality produced by unregulated markets. As a result
there was strong support for a corporatist socio-economic policy approach [Luksic (1996a)].
Secondly, there was majority support among workers and the general population for worker
participation in ownership and management of enterprises. Thirdly, the unions which had
played a limited role in the self-management system, primarily that of guarding of the rights
of workers under self-management and providing social and recreation services for workers,
began to rapidly transform themselves into western European style industrial unions and
quickly developed the expertise and institutions for collective bargaining in a highly regulated
labour market.
Political developments after independence supported the growth of a moderate, evolutionary
economic policy regime. The centre right coalition that attained power just
before independence (1990) was relatively quickly (1992) replaced with a centre or centre-left
alignment which has remained in power through most of the following period 2 .
In part because of the pressure from the left of the alignment, the Associated List which
was the direct descendent of the former Communist Party, the government maintained a
moderate and gradualist approach to the reform of the economic institutions.
THE QUESTION OF FOREIGN INVESTMENT
Economist both within and without Slovenia argued that in order to restructure, privatize
and revitalize the economy, a major infusion of foreign investment was required.
In fact, however, Slovenia managed that transformation, privatization and resumption of
economic growth without any signifi cant reliance on FDI. The reasons for the minimal
infl ow of FDI were several. The Director of Research for the Bank of Slovenia, Francek
Drenovec, has suggested four of the main reasons.
The fi rst, and perhaps the most important from the supply side, is the size of the
domestic Slovenian market. Population of the republic is just under two million and,
despite its high per capita income relative to all the other transitional economies, the total
2 The Liberal Party-headed coalition government of Janez Drnovsek fell in the summer of 2000
and was replaced by a right-wing government. However, in November, parliamentary elections
returned his Liberal led coalition to power with a stronger centre-left mandate.
579

domestic market remains small. The approximate relative size of the domestic markets
for the four leading transition economies can be calculated by multiplying per capita incomes
(measured in purchasing power parities) in 1995 with the approximate mid-decade
population of the four countries. The index of market size so calculated is given in
table 1 (Slovenia equals 100).
Table 4.1
Index of Relative Size of Domestic Markets:
Selected Transition Economies (Circa 1995)
Country Index
Slovenia 100
Hungary 320
Czech Republic 470
Poland 1,010
Source: Income Data, Ferfi la and Phillips (1999a) 370; Population, Various country web sites.
Note that Hungary, the next smallest of the more advanced transition economies, had
an internal market over three times the size of the Slovenian domestic market. The Czech
Republic market was almost fi ve times that of Slovenia while Poland=s internal market
was over ten times the size despite its relatively low per capita income. Thus, the small
size of its domestic market, despite Slovenia=s rank as the highest income transitional
economy, gave little incentive (at least relative to the other transition economies) for FDI
directed at its domestic market.
A second reason for FDI would be to utilize low cost labour in export platforms producing
for markets in the EU or for third countries where Slovenia might have some competitive
historical or political advantage. The problem is that Slovenia is not a low wage
country, nor does it have large pools of unemployed labour, though it does have a good
supply of relatively skilled labour which is largely already employed. As a rough gauge of
the potential low wage pool available (i.e. unemployed workers) calculated from relative
unemployment rates, we have estimated that the unemployed pool in Hungary is around
six times the pool in Slovenia, over four times in the Czech Republic and thirty two times
the Slovenian pool in Poland.
Slovenia had developed joint ventures long prior to independence, particularly in
the motor vehicle and related industries serving the regional and EU markets (e.g with
Renault in cars and Good Year in tires) but there was little in the way of new ventures
or new partnerships directed at the European market. Furthermore, the civil wars and
the consequent economic sanctions and dislocations in the former Yugoslavia, the collapse
of the Soviet Union and with it the economies of Russia, many of its former
republics, and other east European states such as Romania and Bulgaria, sharply limited
opportunities for developing markets in most of Slovenia=s traditional or >natural=
market area.
Thus, though FDI per capita in Slovenia is of the same order of magnitude as that in
Hungary and the Czech Republic and approximately double that in Poland in 1998, this
was not by and large a consequence of a signifi cant post- transition infl ow of FDI as it was
in the other advanced transforming economies. This is demonstrated in table 2.
580

Table 4.2
Stock of Foreign Direct Investment in Selected Transitional Economies: 1998
(In US Dollars)
Stock Stock per capita % Increase in Stock
(Million) 1992-1998
Slovenia 2,907 1,466 178.4
Hungary 19,500 1,932 339.5
Czech Republic 10,591 1,029 573.3
Poland 27,280 706 1,718.7
Source: GZS (2000) calculated from data from the Vienna Institute for International Economic Studies (WIIW).
The lack of a large domestic market and the limited attraction of Slovenia as an export
platform only explains the lack of FDI in new ventures. It does not, however, explain the
failure of foreign capital to participate in the privatization process and to invest in existing
enterprises and industries through the purchase of all, or portions, of fi rms undergoing
or already privatized or to invest additional funds in existing fi rms seeking to expand
or acquire new technology as had occurred in many of the other transitional economies.
Drenovec has suggested three additional reasons for this, lack of government encouragement
for FDI, the nature of the privatization process in Slovenia, and the lack of any critical
need for FDI either for balance of payments reasons or for growth and stabilization
reasons [Drenovec (2000)].
The Slovenian government has always professed support for FDI refl ecting the views of
the EU, IMF, OECD and most domestic economists. However, such support, particularly
strong in the early days of independence, has been temperer as the economy strengthened
and Slovenia witnessed the experience of other countries and the various currency crises.
There has been considerable fear that Slovenian independence and sovereignty would be
compromised by large infl ows of foreign investment [Ferfi la and Phillips, (1999) p. 397].
Furthermore, there was the need to restrict the infl ow of foreign investment in order to
prevent an unwarranted increase in the exchange rate and infl ationary monetary and real
pressures on the domestic economy. Furthermore, domestic investment had recovered to
almost a quarter of GDP by 1995 and to over a quarter by 1999 (see Appendix) demonstrating
that FDI was not required for macroeconomic performance and growth. Nevertheless,
support for increased levels of FDI is still strong among economists, though on the questionable
grounds that such investment is necessary to promote technological dynamism. 3
The fact was that there was no need for distress selling of domestic industrial assets to
foreign owners. Slovenia did not have a cash fl ow problem nor any problem servicing its
debt, nor was there any need for an infl ow of foreign exchange to stabilize the currency
or prevent an exchange rate crisis. Despite pressure from international fi nancial advisors
to do so, Slovenia did not adopt a fi xed exchange rate system as many other transitional
economies did, but rather introduced a >managed fl oat= exchange rate system. Indeed,
3 Foreign direct investment in Canada, for instance, has been associated with low levels of
research and development in Canadian subsidiaries and with high levels of payments for business
services and transfers of income for interest, dividends, royalties and licensing payments. On the
other hand, the OECD economic survey of Slovenia (1997) reported that fi rms with foreign equity
of at least 10 per cent reported higher profi ts and sales, stronger export orientation, higher capital
intensity and higher solvency when compared with domestic fi rms. However, as the report notes,
Aforeign investors would naturally have been attracted to companies which were strong to begin
with.@ [OECD (1997), 113]
581

Slovenia=s problem was just the opposite that faced many other countries, a too great an
infl ow of foreign exchange which necessitated measures to restrict the infl ow.
However, the factor that most restricted the infl ow of FDI during the transition period
was the form of privatization process. We have described the process in greater detail
elsewhere [Ferfi la and Phillips (1999); Phillips and Ferfi la (1999a, 1999b, 2000)] but, in
essence, privatization proceeded primarily through internal labour-management buyouts
[ARSPP (1999)], almost none after the initial period of >spontaneous privatization= involving
signifi cant foreign investment. As Bojnec reports:
582
Between 1989 and 1991, the process of privatisation was based on Aspontaneous
privatisation@ and some big enterprises were partly sold to strategic investors, including
foreign ones. Between 1992 and mid-1994, the privatisation of enterprises ... was
stopped..... However, the privatisation framework and institutional setting adopted
after 1992 favoured internal, management-labour buy-outs, with particular reluctance
to allow external, especially foreign, participation in the mass enterprise privatisation.
Priority was given to internal enterprise ownership, to manages and employees.
[Bojnec (1999) 73]
Furthermore, restrictions on the sale of shares distributed through coupon distribution
and the underdeveloped state of the secondary securities market suggest that
signifi cant foreign equity participation will not likely occur in the immediate or near
future. Drenovec argues that there will be no infl ow of FDI into established fi rms until
ownership of shares is consolidated allowing block sales to foreigners. Nevertheless, it is
at least arguable that Slovenia=s macroeconomic stability and growth has been, at least
in part, because of, not in spite of, limited FDI during the transition process which has
allowed the country to maintain a greater degree of control over its economy and the
macroeconomic levers, in particular, monetary policy.
CONDUCT OF MONETARY POLICY
As noted previously, the implementation of monetary policy was constrained by a
number of institutional and market factors, not least being the absence of a functioning
money market. This, and the dominant position of the banking system, precluded the
use of open market operations or overnight and interbank loans to control the interest
rate. Rates were established by the banks and these rates were infl exible and not susceptible
to easy management or change. Further, given the small size of the economy and
its openness such that the combined value of exports and imports exceeded 100 per cent
of GDP, the need to manage the nominal value of the exchange rate to retain currency
stability was paramount.
Additional structural constraints on monetary policy identifi ed by Feyzioglu included
a Ashallow and distorted domestic interbank market, a high [degree of currency substitution,
[and] extensive indexation of wage and fi nancial contracts@ which contributed to
limiting the >transmission belts= of monetary policy. This was exacerbated by the low
level of consumer and government debt which provided limited depth for fi nancial intermediation
[Feyzioglu (2000), 56-57]. 4 Most corporate debt was Ahidden@ in the banks in
the form of enterprise loans [Vicic (2000)]. Despite the high (by international standards)
4 Feyzioglu notes that the ratio of loans to GDP in Slovenia in 1998 was 45 per cent compared with
75 per cent in the four largest EU countries and 150 per cent in Germany [Feyzioglu (2000), 57].

investment rate in the later nineties, most fi nancing was done through retained earnings
rather than by the banks or through the issuance of equity. In any case, a primary equity
market did not exist [Feyzioglu, 57; Vicic]. Furthermore, interest rates were effectively
determined by foreign borrowing rather than by the domestic market.
1991-1995
For these reasons, the Bank of Slovenia in its attempt to reduce infl ation targetted the
money supply rather than the interest rate. It was able to control the money supply primarily
because of the lack of a money market or any alternative fi nancial institutions or
credit instruments to the regulated banks other than foreign exchange market which the
BS moved to contain. From 1991 to 1996 the target was M1 adjusted on a monthly basis.
For instance, the Bank reported in its 1993 Annual Report:
The basic goal of monetary policy in 1993 was to further lower infl ation. As in 1992,
the Bank of Slovenia set itself the intermediate goal of targeting base money, with monthly
targets based on the demand for money function and the money multiplier. Other
possible goals such as the exchange rate or the level of interest rates were supported
with individual measures only to the extent permitted within the planned monetary
framework, which was the primary goal. [p. 19]
The initial move of the BS, once it had taken over the monetary policy function in October
of 1991, was to drain liquidity from the banking system through the imposition of obligatory
reserves. The rate on deposits of up to three months was raised from 6.9 to 20 per cent,
though this move was only temporary and was meant to replace obligatory deposits with
the Yugoslavian central bank which were no longer in effect. Banks were eligible for liquidity
loans only against collateral of high-quality paper and only to a value of 60 per cent of
collateral while the BS reduced access to the discount window by over 70 per cent between
October and the end of November, though this was also offset somewhat by the introduction
of repurchase agreements (repos) of Republic of Slovenia bonds [Annual Report 1991, 23-24].
As a result, real M1 fell by around 30 per cent in the last three months of 1991. Retail price
infl ation over the same period also decreased from a monthly rate of 22 per cent in October
to just over 15 per cent in December.
This period of acute restraint lasted into March of 1992 by which time M1 had declined
a further twenty per cent while retail price increases levelled out a just over 10 per cent per
month. M1 remained low despite increasing real demand both because of falling infl ation
and a rise in real transactions. Nevertheless, the continued monetary restraint paid off in
infl ation terms as monthly increases in retail prices fell to an average of around 2 per cent
during the second half of 1992 [Annual Report 1992, 16-17].
The main problem that faced the BS in implementing the strict control of the money
supply (high-powered money and M1) was the current account surplus and the excess
supply of foreign currency. In fact, the BS moved quickly to utilize the foreign exchange
market to carefully control the supply of money by sterilizing the infl ow of foreign currency
and monetizing only that amount that would provide for expansion of M1 within
it predetermined target band.
Thus, Belaisch models the monetary-exchange rate tightrope facing the BS in terms of
instruments and objectives [Belaisch (2000), 46].
583

584
Instruments Objectives
Spot foreign exchange market interventions
Stock of foreign exchange bills Exchange Rate
Base money Infl ation
By 1992 the BS had developed its primary modus operandi in the face of a continued surplus
of foreign exchange. The Bank did not automatically buy the surplus to prevent Tolar
appreciation because it would thereby lose control of the Tolar money supply. It achieved
its goal by selling foreign exchange bills while at the same time Aintervening on the open
market with lombard loans and the purchase of foreign exchange, meanwhile conditioning
this intervention on the amount of foreign exchange which the banks had to purchase from
exports, and with the exchange rate at which the transactions were made@ [Annual Report
1992, 19]. At the same time, banks were required to hold minimum foreign exchange accounts
abroad to safeguard liquidity and, in the summer of 1992 limits were placed on borrowing
abroad for conversion into Tolars and on short-term borrowing abroad. Minimum
foreign exchange holdings of banks were initially set at 35 percent of average monthly fl ows
over the previous 3 months and at 30 per cent of household deposits, but by September the
household reserves were raised to 90 percent for demand deposits, 75 per cent for deposits
of up to 3 months, 35 percent on those of 3 to 12 months and 5 per cent on those over a
year. Furthermore, banks were required to hold a minimum of liquid reserves against 75
per cent of their net short-term indebtedness, a fi gure raised to 100 per cent the following
year. These reserves, however, could be met by holding foreign exchange bills issued by the
BS. In addition, lombard loans were made conditional on the banks= obligation to purchase
and sell foreign exchange at a stipulated rate [Annual Report 1993, 25]
Thus, by mid decade the instruments and goals of monetary and exchange rate policy
had become established and refi ned. Reserve requirements remained quite high at the
short end ranging from 12 per cent for sight or short-term deposits to 1 per cent for
deposits of greater than 6 months maturity. On the long end, reserve requirements for
deposits over one year were eliminated. The BS continued to withdraw base money from
circulation by issuing foreign currency bills, Tolar bills and twin bills (denominated in
both Tolars and foreign currency), all of which could be used as collateral for lombard or
liquidity loans or for repos in order to maintain liquidity. Such loans were usually conditional
on the purchase of foreign exchange. Meanwhile, BS, intervention in the foreign
exchange market Awere again the most import source of base money creation@ [Annual
Report 1994, 28].
BANK REHABILITATION
The BS despite its primary anti-infl ation posture, wanted also to develop the money
market and to reduce interest rates to competitive European levels to lessen appreciation
pressure on the Tolar. In 1993 the Bank was able to leverage a marked decrease in the real
interbank rate in addition to a substantial decline in the discount and lombard rates. At
the same time, the Bank began the gradual attempt to introduce nominal interest rates
on short-term instruments to replace the indexation on almost all fi nancial instruments
that had prevailed since independence. The Bank felt that indexation reduced the effectiveness
of the interest rates as a transmission mechanism of monetary policy and also
served to perpetuate infl ation. Nominal rates were introduced for the discount rate and

the lombard rate in 1994 with other, longer-term instruments to follow as infl ation was
reduced.. Previously, all rates were indexed to the >revaluation clause= or >basic interest
rate measure= (temejana obrestna mera or TOM in Slovene) which initially was indexed
monthly though by 1997 was calculated on the previous 12 month base.
Central to the development of a fl exible and responsive money market, however, was
the need to reform and rehabilitate the banking system. A fi rst step was, effectively, to
>nationalize= the banks which had previously been tied to enterprises, to relieve these
banks of bad loans and obligations, particularly loans to debtors in enterprises in the
former Yugoslavia and obligations in the form of foreign currency deposits in the old Yugoslav
National Bank (YNB). An additional goal was rationalizing the fragmented banking
system in order to reduce the excessive operational costs.
The technique adopted in 1993 was to write-off current losses against capital, to sell
bad assets to the Agency for the Rehabilitation of Banks (established in 1991) in exchange
for bonds issued by the Agency thereby eliminating the problem of bank insolvency, and
thirdly, to recapitalize the banks through purchase by the Agency. The capital adequacy
rate was established at 8 per cent. Thus, the Agency became Athe largest single creditor
in Slovenia@ and a key player in real sector restructuring [Annual Report 1993, 23]. The
intent was that once the rehabilitation process was complete the banks would be sold to
private owners. However, in 1999 the two largest banks, the Nova Ljubljanska Banka and
the Nova Kreditna Banka Maribor which together controlled close to half the banking
business in Slovenia, remained state owned.
1995-2000
By mid-decade, however, the macroeconomic climate had begun to change. In 1995, the
main source of money creation became loans to enterprises and households and to government,
with increasing reliance on repos to create base money though these remained
conditional on the purchase of foreign exchange. However, continuing infl ows of foreign
exchange strained the system and necessitated an increase in the foreign exchange reserve
requirements. Reserves against household sight deposits were increased to 100 per cent,
time deposits to 75 per cent. Reserves on non-resident deposits were 90 per cent and 75
per cent for 1 to 3 month deposits. Banks= reserves of foreign exchange remained at 35 per
cent of average payments abroad over the previous 3 months. Banks were also required
to hold liquid foreign exchange against 75 per cent of their net foreign exchange obligations.
Furthermore, as the money market developed, the Bank=s practice of implementing
monetary policy through targetting M1 became both less feasible and less credible. Also in
1995, new regulations were introduced to control the infl ow of portfolio capital and foreign
currency loans. In February, the BS introduced a non-interest, compulsory deposit of 40
per cent of foreign, non-traded related loans with maturities of less than 5 years. This was
later extended to 7 years and a further 10 per cent non-interest bearing custodial deposit on
loans with maturities greater than 7 years [Annual Report 1996, 24].
However, the major challenge to the prevailing system came the following year, in
1996, with a major increase in portfolio investment infl ow which necessitated further
changes in the conduct of monetary policy. The expressed intent of the central bank was
to reduce infl ation to European Union levels in order that Slovenia could begin the transition
from its managed fl oat to a fi xed exchange rate system as a requirement for entry
585

into the EMU. Further, the Bank was obviously unhappy with its monetary policy being
obligated to function simultaneously as an incomes policy. Again the tension between
the role of monetary policy in restraining domestic prices and incomes and in maintaining
a stable effective exchange rate became manifest. This was exacerbated in the latter
months of 1996 because of a growing volume and unpredictability of portfolio investment
infl ow and the consequent effects on the money supply. Reduction of interest rates
to dampen the infl ow would fuel domestic infl ation which remained stubbornly high
because of Aprice acceleration in non-tradable sectors@ and the lack of any alternative and
effective instrument of incomes policy [Annual Report 1996, 11-12]. 5
The increased infl ow also posed problems for the Bank in controlling the money supply
as it:
issued money through foreign exchange transactions and withdrew it by means
of Tolar transactions....
The increasing burden of sterilisation of foreign exchange infl ow forced the Bank
to speed up adoption of complementary legal and regulatory framework. As of June,
the regulation on compulsory liquidity reserves in foreign exchange (foreign exchange
minimum) also includes increasing obligatory holdings of foreign exchange denominated
Bank of Slovenia bills. As of August and December respectively, obligatory
non-interest bearing deposit of 40% in Tolar counter-value is to be paid on any and all
drawings under non-trade related loans taken abroad with maturity up to 7 years, and
10% on those with maturity over 7 years [Annual Report 1996, 13]
These measures had the desired effect. While bank borrowing fell in 1997 by 63 per
cent to Anegligible levels@ and the average maturity of loans rose to over 7 years, foreign
direct investment in the same year grew by 73 per cent [IMF (2000), 3]. As the BS reported,
unlike 1996, in 1997 the major part of foreign exchange infl ow was in foreign equity
and portfolio investment, not foreign loans.
However, the portfolio infl ow also posed a destabilizing threat that forced the Bank to
extend custodial accounts to portfolio investment.
586
Low interest rates in developed countries and high interest rates in countries such
as Slovenia encourage foreign portfolio investments. Such investments are very sensitive
to any changes and problems in the economic environment of the host country. Their
volatility represents a threat to less developed fi nancial markets. Foreign portfolio investments
increased sharply following the relatively good country risk rating assigned
to Slovenia for the fi rst time in 1996, and due to the relatively high level of domestic
interest rates (and about 9% p.a. infl ation) and low level in prices of equity of privatized
companies. Given the small monetary area and consequently limited possibility of the
Bank to neutralize any big-scale adverse effects B pressures of such capital infl ows on the
exchange rate, the Bank required as of February that non-resident portfolio transaction
be channeled through custody accounts with fully licensed domestic banks. Pursuant to
revision in July, the requirement exempted committed long-term portfolio investments
of at least seven years. The measure was introduced, among others, additionally with
the purpose to protect long-term foreign investors against any exogenous market turbulence.
Pursuant to the stipulations of the Association agreement with the EU, portfolio
5 In any case, Interest rate transmission of monetary policy, according to Belaisch, was hampered
by two factors: indexation of interest rates Asince forward-looking infl ation expectations did
not affect the level of interest@; and because of the non-competitive banking system which determined
interest rates Aprimarily with the view to preserving banks= margins.@ [Belaisch (2000), 42]

investments are to be fully liberalized after four years following the coming into force of
the Association Agreement [Annual Report 1997, 33].
Thus capital controls proved successful in insulating Slovenia from destabilizing shortterm
capital infl ows though it was recognized that such measures were only temporary.
The development of money and fi nancial markets also continued with deindexation,
the increased use of repos, and the introduction of a number of new fi nancial instruments
both by the BS and the Treasury. But these developments and the Bank=s recognition
of the increase in liquid market instruments, combined with the fi nancial infl ows,
induced the BS to abandon M1 as the intermediate monetary target in favour of M3,
while actual day-to-day monetary policy focussed on, and adjusted to, market interest
rates and other monetary indicators.
Also changing the context of monetary policy was the prospect of liberalization and
deregulation of fi nancial markets and capital fl ows as required for accession to the EU. In
practice, real interest rates declined Ain response to high borrowing of the corporate sector
abroad@ given the expectation by the commercial banks of increased foreign competition
with liberalization [Annual Report 1998, 23]. Deindexation of fi nancial instruments was
further extended to 270 day bills in 1998 despite the persistent infl ation which was being
fed by sharp upward moves in controlled prices as they were increased toward AEuropean
levels;@ and in mid 1999 by the introduction of a European-style Value Added Tax (VAT).
Partially offsetting these problems was the decline in foreign exchange infl ows which were
reduced, not primarily on the capital account side, but rather on the current account which
was basically brought into balance in 1998 before turning strongly negative in 1999. With
appreciation of the Tolar, this helped somewhat in restraining infl ation.
Changes in monetary and exchange rate policy in the second half of the decade were
moderate and, with the exception of the capital controls on the infl ows of short-term
money, were directed a a gradual reduction in regulation, the development of Europeanstyle
fi nancial markets and institutions, stabilization of the exchange rate, controlling
the domestic money supply, and reducing infl ation. In all of these areas, except perhaps
the last, Slovenia was largely successful. Monetary policy is, at best, a crude lever for
the implementation of an anti-infl ationary incomes policy. It works primarily through
unemployment and the suppression of domestic demand brought on by credit rationing
and high interest rates. Since combatting unemployment generated by restructuring
and maintaining social harmony were also prime goals of the Slovenian government,
an excessively tight monetary policy was politically diffi cult. Furthermore, it would also
tend to cause the Tolar to appreciate and exacerbate the infl ow of short-term capital
causing further problems in controlling the money supply. In any case, because of still
widespread indexation of fi nancial instruments, wages, pensions and other benefi ts, and
combined with the low levels of consumer, corporate and government debt, interest rates
remained a poor transmission mechanism between fi nancial and real-economy markets.
Indeed, recognition that monetary policy was a poor substitute for a real incomes
policy came in 1994 with the establishment of the Social and Economic Council and the
adoption of the fi rst Social Pact [Luksic (1996a), 166]. The Pact, and subsequent agreements,
have credited with containing infl ationary cost pressures during the second half
of the decade despite an initial minimal, and subsequent declining, commitment to tripartite
social contracts by the government. 6
6 The origins and impact of the Social Economic Council and incomes policies are described
in chapter 5 and 6.
587

588
MACROECONOMIC AND MONETARY POLICY AND THE OPENING TO EUROPE
The real challenge to an effective independent monetary policy designed to stabilize
and promote growth and reconstruction of the economy comes not from within Slovenia
but rather from the very process of integrating into Europe, liberalizing its fi nancial structures,
deregulating its markets and opening up the economy to foreign capital, a process
underway throughout the period since independence but which was greatly accelerated
as the decade ended . The key in this acceleration was the EU Association Agreement
signed in February 1999 and the Foreign Exchange Law passed in September 1999 which
followed from a European Commission report in November of the previous year that was
critical of Slovenia=s slow progress toward liberalizing fi nancial markets and open up the
economy to foreign capital [IMF (2000), 8]. 7
The EU Association Agreement removed or greatly reduced most regulations restricting
capital account transactions including barriers to entry of foreign bank branches and
restrictions on FDI and foreign ownership. 8 Restriction of foreign portfolio investment
was to be removed after four years although Slovenia retained the right to introduce
temporary (six months duration) capital account controls should capital fl ows threaten
to destabilize monetary and exchange rate polices. Custody accounts were retained at
a reduced percentage of foreign loans for a period of two years [Annual Report 1998, 80;
IMF (2000), 8]. The provisions of the Association agreement were further accelerated by
the Foreign Exchange Law in September 1999 which abolished the mandatory deposit
requirement on non-trade related debt, reduced restrictions on resident foreign currency
accounts (though not those on non-resident accounts), and reduced custodial account
requirements on portfolio investment to one year [IMF (2000), 8].
The new banking law went a great way in harmonizing Slovenia=s banking system with
directives from the EU, introduced deposit insurance, and opened up Slovenia to foreignbranch
banking (although only after full accession to the EU). Minimum bank capitalization
was set at SIT 1 billion with a capital adequacy ratio of 8 per cent. Other parts of
the legislation regulated risk management and exposure policies. Though not in the bank
legislation, the interbank agreement providing for a ceiling on deposit interest rates was
cancelled with rates now to be set by market competition [Annual Report 1998, 46-7].
In addition to these central measures were a host of other legislation opening up and deregulating
the Slovene economy and promoting privatization and private sector development.
The IMF Report lists a total of sixteen new pieces of legislation or other measures passed in
1999 or January 2000 to conform to the model of an open, neo-liberal capitalist economy. 9
There is, however, a high degree of risk in adopting this open-market policy prescription,
a risk that even the IMF recognizes.
7 In addition, a new Pension law was adopted which, in the IMF=s view, helped in Arationalizing
the structure of public fi nances.@ The law, passed in December 1999, Astrengthened the fi nancial
prospects of the current pay-as-you-go system by gradually raising the retirement age, changing
the basis of calculation of benefi ts, and launching a supplementary social insurance scheme, and
introducing a voluntary, private pension pillar.@ [IMF (2000), 8]
8 FDI was redefi ned to include stakes in companies of as little as 10 % (formerly 50 %) and portfolio
investment of over 4 years (formerly 7 years).
9 A These measures enhanced Slovenia=s credibility and were recognized by the European Commission
in its October 1999 Regular Report.@ [IMF (2000), 8]

However, the authorities and the staff agreed that these projections [of stable growth]
were subject to substantial uncertainty. Not only would the outlook for growth
continue to depend B as it always had B on foreign demand, but Slovenia=s deepening
integration in the international fi nancial market would increase the potential volatility
of the capital account. A new episode of capital infl ows would put pressure on competitiveness
and might ultimately undermine growth. Conversely, turbulence in fi nancial
markets or a shift in perceptions of Slovenia could lead to the drying up of nondebt-creating
fl ows. In either case, risks would arise for the banking system [IMF (2000), 9].
In short, Slovenia=s use of the levers of monetary policy that it has employed so successfully
in the decade after independence to stabilize the economy have now largely
been precluded by recently adopted legislation while growth is conceded to be dependent
on exogenous foreign demand beyond the control or infl uence of Slovenia.
Belaisch argues that liberalization of capital fl ows and opening the capital account
will allow the BS to focus on infl ation control since intervention to protect the exchange
rate will no longer be possible. She concludes, Aalthough it is likely to result in somewhat
higher exchange rate volatility than in the past, it will make monetary policy intervention
more effective [against infl ation]@ [Belaisch (2000), 53]. This, as the IMF notes, assumes
effi cient and fl exible markets. However, fl exible markets has become the code words for
labour market fl exibility which, in turn, equates with downward pressure on wages, declining
unionization, loss of job security, higher employment volatility, an increase in
contingent (part-time, temporary and contract) jobs, and declining welfare benefi ts. This
can already be seen in cutbacks in the new pension legislation.
The neo-liberal prescription of labour market fl exibility, endorsed by the EU, the IMF,
and the OECD (as part of the so-called AWashington Consensus@ for developing nations
and for renewed European growth ), however, has increasingly come under attack by
many prominent economists involved in the fi eld of trade and growth. 10 Perhaps the
most damaging criticism has been that of Joseph Stiglitz, a former member of President
Clinton=s Council of Economic Advisors, and former Vice-President and Chief Economist
at the World Bank. Writing while still with the World Bank, Stiglitz notes:
It is certainly theoretically possible that greater wage and price fl exibility actually
leads to a lowering not just of welfare ... but of output. Recent cross section estimates
of output variability and the likelihood of recessions suggests that greater wage fl exibility
is either unassociated with greater output stability or may actually contribute to
an enhanced likelihood of a recession [Stiglitz (2000), 8].
Furthermore, he argues that labour market fl exibility can undermine industrial relations
and worker participation in decision making thereby reducing productivity and
growth [Stiglitz (2000), 9ff]. It is also likely to exacerbate social confl ict to the detriment
of the economy at both the aggregate and individual level. 11 As Stiglitz points out, capital
market liberalization in East Asia benefi tted few and impoverished many through falling
10 The most sustained and detailed attack based on case studies, including the role of such policies
in the destruction of the former Yugoslavia, can be found in Michel Chossudovsky, The Globalization
of Poverty: Impacts of IMF and World Bank Reforms (Penang: Third World Network, 1997).
11 A But long term social contracts between fi rms and their workers may make them more accepting
of B and more promoting of B change and progress. Indeed, the breaking of the social contract
and the undermining of social capital is increasingly being given Acredit@ for the huge decreases in
productivity in the former Soviet Union.@ [Stiglitz (2000), 16]
589

wages and increased unemployment. Such liberalization pays no heed to the welfare of
workers Aapart from sermons about the virtues of bearing pain.... [A]dvising countries
to have more fl exible labor markets may be tantamount to telling them to give up hard
won advances in labor standards. And even the welfare gains may be problematic, once
the social costs of the risks imposed and the adverse macro-economic effects ... are taken
into account [Stiglitz (2000), 19, 21-22].
Moreover, the whole strategy of free trade and capital-fl ow openness as a development
strategy for small countries has been questioned by leading trade economists. Speaking
before an IMF seminar in May 2000, Dani Rodrik of Harvard University questioned the
whole rationale of international economic integration as a development strategy. 12 He
noted that capital market integration can have perverse effects on capital fl ows, increase
credit rationing and the volatility of boom-bust cycles, and promote periodic fi nancial
crises. He argues:
590
Thus, despite what passes for the prevailing conventional wisdom, integration into
the world economy may not, by itself, be the best or only way for countries to grow,...
The issue ... is not Amore trade versus less trade,@ or Amore openness versus less openness.@
It is, rather whether globalization is a viable development strategy in and of itself.
What policy makers should focus on ... is the degree to which policies and institutional
reform should be targeted on trade and capital fl ows, as opposed to domestic investment,
technological capabilities, and institutions that serve purposes far beyond that of
facilitating globalization.... But the choice of priorities and institutions should be home
grown; tailored to domestic needs, aims, and objectives; and based on a consensus
drawn from all segments of the domestic population [Rodrik (2000),192].
The recent moves by Slovenia to surrender Athe choice of priorities and institutions@
to the EU may yet prove to be the unravelling of the highly successful monetary and foreign
exchange stabilization policies of the transition period that has resulted in Slovenia=s
superior macroeconomic and growth performance since 1993.
12 Stiglitz, referencing studies by himself, Rodrik, Demirguc-Kunt and Detragiache, and by Easterly,
Islam and Stiglitz, questions any effi ciency benefi ts from fi nancial market liberalization. He further
stresses that liberalization Aunambiguously contribut[es] to economic volatility and an increased
probability of fi nancial and currency crises and recessions.@ [Stiglitz (2000), footnote 36]

CHAPTER 5
LABOUR AND THE TRANSITION:
PART I: UNIONS AND THE EVOLUTION
OF A NEW INDUSTRIAL RELATIONS
Many analysts of the transformation of the Slovenian economy, from a constituent republic
of the Yugoslav Federation to an independent country and now an integral member of
the European Union, have described the process as a transition from a socialist to a market,
or more emphatically, a >full-fl edged=, market system. 1 In a very important sense, this obfuscates
the real content of the transformation, in part because Slovenia had many elements of
a market system prior to the breakup of Yugoslavia. The more important point, however, is
that the core transformation that took place during the late 1980s and the 1990s was not in
the increased embrace of markets, but in the transformation of labour-capital relations, from
a market socialist to a (capitalist) social market system or, as Stiblar and Volje put it, from a
Asocialist economy based on labour self-management to a capitalist market economy.@ [Stiblar
and Voljc (2003), p. 265] This is by far a more substantive change in the economic system than
the change from a regulated market to a >full-fl edged= market system. It constitutes, in effect,
a counter-revolution, reversing the revolution which took place in Tito=s Yugoslavia after the
Second World War. And the centre of that counter-revolution was the labour market. Thus, it
is to the labour market we must look for the key to the transition and also, the key to understanding
why the process took place relatively peacefully despite its enormous implications
for class and social relations in post-independence Slovenia.
Indeed, the transition in Slovenia after the late 1980s involved more than just one
major socio-economic change, though the change in property relations was the central or
key one. Slovenia also went from being a region and a subsidiary political unit of a larger
country to being a nation state on its own. However, from the point of view of the impact
on labour force distribution, participation rates, and the allocative function of the labour
market, the signifi cant change was a reorientation of the Slovenian economy from its
inward looking focus on import replacement for a protected Yugoslavian economic market
to an export centred, competitive, western European focus. Whereas the changes in
property relations made necessary the evolution of a signifi cantly different set of labour
market institutions, a new system of industrial relations, and new mechanisms for wage
and benefi t determination at both the micro and macro levels, the reorientation of the
economy from internal to external markets with the ultimate goal of entry into Europe
and the competitive challenges and market reforms that were required for EU membership,
presaged a major structural change in the labour market.
In Labour and the Transition: Part I, we will concentrate on the transition from socialist
self-management to capitalist property relations and the consequent transformation of labour
market institutions, unions, and the industrial relations system at both macro and micro
levels. In Part II we will look at structural changes in the labour market and the policies
that have been developed to mitigate the negative affects of rapid structural adjustment
and to improve the effi ciency of the labour market as an allocator of human resources.
1 See, for example, many of the chapter contributions in Mrak, et al. (2004).
591

592
ECONOMIC CRISIS AND THE END OF LABOUR
SELF-MANAGEMENT
As the economic crisis in Yugoslavia deepened in the second half of the 1980s, it is
clear that the political and economic elite had become disenchanted with the socialist
self-management system and, in particular, with social ownership and the accompanying
system of associated labour which was increasingly blamed for precipitating the country=s
economic woes. Western trained economists were particularly critical of the effi cacy of
the socialist self-management model, basing their critique in part on the theoretical models
of Ward-Vanek and Furubotn-Pejovich, which predicted underinvestment and labour
dis-employment resulting from worker preference functions which favoured the distribution
of enterprise income to workers over investment and employment growth. [Gligorov
(2004) pp. 17-18, 21, 22; Domadenik and Prasnikar (2004) pp. 248 ff.] Not all economists
agreed, noteably the well-known Yugsoslav economist, Branko Horvat who wrote numerous
articles, many in the Beograd economic journal, Economic Analysis and Workers'
Self-Management, challenging both the theoretical argument and the empirical evidence
for the Ward-Vanek and Furubotn-Pejovich effects. 2
Nevertheless, faith in self-management and social property among the political elite
was eroded by the failure of the system to respond to the economic crisis that followed
from world recession, Athe political vacuum after Tito=s death in 1980, the rise in oil
prices, and the tightening of world fi nancial markets.@ [Mencinger (2004) p. 68] As Gligorov
notes, the crisis was not unique to Yugoslavia nor to the socialist system. What
characterized the Yugoslav crisis, however, was the state=s inability to overcome the macroeconomic
problems because of weak governance at both the macro and micro economic
levels. [Gligorov (2004) pp. 22-23; see also Mencinger (2004) pp. 68-69] It was this failure,
and the political divisions created by the failure, that prompted the federal government
of Branko Mikulic to seek solutions in systemic change on the Apremise that social ownership
of the means of production, the so-called nonproperty concept of social property
... [was at fault and needed to] be abandoned.@ Consequently, self-management would
also have to be replaced by capitalist labour-management relations. [Mencinger (2004) p.
69] As a result, in December of 1988 the Yugoslav government passed two radical reform
pieces of legislation, the Foreign Investment Act and the Enterprise Act, which effectively
overturned completely the socialist, self-management system and, with it, reversed the
entire relationship of labour to capital. This was followed in 1989 by the Social Capital
Act that allowed workers= councils to sell Atheir@ enterprises (which, in fact, they did not
own) to private owners. [Gligorov (2004) p. 70]
This overthrow of the existing system is readily apparent when we compare the employment,
labour process and wage determining institutions under self-management with
those under the capitalist system mandated by the 1988-89 legislation. Under the socialist
self-management doctrine:
Associated labour is based on the social character of labour and its need to be
pooled for the purpose of achieving social productivity of labour. It acquires its true
2 Many other economists have also disputed the theory behind the Ward-Vanek and Furubotn-
Pejovich effects and have written extensive refutations. Perhaps one of the most comprehensive
and convincing is Bruno Jossa and Gaetano Cuomo, The Economic Theory of Socialism and the Labourmanaged
Firm (Cheltenham, UK: Edward Elgar, 1997).

meaning in conditions when workers, working with socially-owned means of labour,
assume direct control over their own labour and over the conditions and results of
that labour, i.e. in the system of socialist self-management.... The distinguishing feature
of associated labour is seen in the relationships among people who acquire equal
rights on the basis of the right to work using socially-owned resources, and above
all in the mutual links in the sharing of income. The sharing of income is in fact the
quintessence of associated labour in socialist self-management, in which the income
of associated workers represents the category which they control in the basic organizations
of associated labour.... Associated labour in socialist self-management, based
on the principle of democratic, self-management decision-making by working people,
consistently expresses the social character of labour and income. [Novak (1980) pp.
135-36]
Compare this with the legislation of 1988-89 which was based on the Arecognition
that those who provide capital are entitled to management and profi t sharing rights.@
[Gligorov (2004) p. 69]
Indeed, the 1988 Law of Enterprises transferred management powers from workers
to equity owners, including the right to lay off workers, though initially this prerogative
was made costly by mandatory notice periods and severance pay requirements. As
Haltiwanger and Vodopivec note, the 1988 law Atransferred decision making rights from
workers to equity owners, thus formally ending the era of self-management.@ As a result,
employment and wage policies underwent major changes. Of particular importance was
the right obtained by employers to lay off workers; and, @on the wage setting front, the
self-managed mechanism was replaced by a system with three components: the Labor
Code, collective bargaining, and incomes policy.@ [Haltiwanger and Vodopivec (2002) p.
7; Vodopivec (2004) p. 294] This wage setting machinery replaced the previous system
under self-management where both government and workers shared wage determination
under strictly determined conditions. Enterprise wage bills were established by the
government and were aimed at reducing wage disparities between fi rms, a procedure
that involved major inter-fi rm income transfers. Within these limits, however, workers
established individual wages through democratic procedures, a process that resulted in
Yugoslav fi rms having exceptionally egalitarian wage structures in comparison to capitalist
fi rms. [Haltiwanger and Vodopivec (2002) p. 10] After the 1988-9 Yugoslav legislation
and the Slovenian Labor code of 1991, however, direct government intervention was
eliminated and wages were to be determined by centralized collective bargaining within
the framework of a general incomes policy.
Thus, there occurred a fundamental change in the nature and character of the relationship
between labour and capital. The democratic self-management of labour which had
devolved power to the workers at the level of the enterprise was replaced by individual and
collective contracts between labour and capital in which the employer, as the agent of capital,
had a proprietary interest though initially, because of the persistence of social property,
the identity of the owner-employer was not clear. [Skledar (1999) p. 6] Managers who had
previously been, at least in theory, the agents of the workers, became =bosses= fulfi lling the
role of equity owners, or at least fulfi lling that role until social capital could be privatized.
They were effectively, in the interregnum, the agents of unspecifi ed equity owners.
Other, more limited, legal changes mandated after 1989, included those requiring
the establishment of private arbitration bodies for settling some disputes, though labour
courts were retained to resolve other individual and collective disputes. The right to strike
593

was embodied in law, though not the right to lockout. However, the 1991 Law on Strikes
did put limits on public sector strikes. [Skledar (1999) p. 14]
It should be recognized that the abolishment of social property and self-management
did little to alleviate the economic crisis in the Yugoslav economy. Nor should
we have expected it to do so since it was the failure of macroeconomic and monetary
policy and the weaknesses in governance, not social property and self-management,
that had perpetuated and deepened the crisis. In any case, the rather incoherent attempts
at macroeconomic stabilization initiated by the Yugoslav government of Ante
Markovic failed, the result not only of external pressures, but also of inter-republic
disagreements on policies and the direction of reforms, ethnic strife and the lack of national
powers to enforce effective monetary and fi scal policies. Stanojevic, for instance,
notes that Ain 1986, the social democrats won control in the Slovenian central committee,
whereas a year later the Stalinists took power in Serbia.@ The result was that
Slovenia favoured more liberal market reforms whereas Serbia pressed for an increase
in centralized government controls. [Stanojevic (2003) p. 296] These differences were
highly instrumental in Slovenia=s growing estrangement from the Yugoslav Federation
which culminated in the decision that had been in the making for much of the previous
decade, to secede from Yugoslavia in 1991.
It was not, however, the secession of Slovenia in 1991 nor the multi-party elections
of 1990 that returned, however briefl y, a right-wing coalition government to power in
Slovenia, that marked the overturn of the socialist self-management system and the restoration
of capitalism. Rather, as we have noted, it was the radical >reform= acts of the
Yugoslav government in 1988-9 that accomplished the great reversal. What these acts
also did was to create a major void in labour market institutions for managing the labour
process and for determining wages and conditions, employment, investment and labour
mobility. Under self-management, workers= interests and their participation in management
was primarily through semi-autonomous workers= councils, often in alliance with
the state against managers which had gained considerable power due to the Astrategic
retreat of the state from the economy@ and the deregulation of enterprises. [Stanojevic
(2001a) p. 4]
The role of trade unions under self-management, however, was ambiguous and marginal.
The major function of protecting workers= interests and determining wages and
working conditions at the micro level B what Stanojevic calls Aarticulating workers= interests
>from below=@ [Stanojevic (2001b) pp 3, 11] B resided with the workers= councils leaving
the unions with the primary tasks of protecting workers= self-management interests
and organizing social, cultural and recreational events and facilities, normally at an enterprise
level. Collective bargaining, to the extent it can be equated with collective re-distribution
at the enterprise level, resided with the workers= councils. All of that changed
with the legislation of 1988-9 which reduced the power and functions of workers= councils
and mandated centralized collective bargaining for the determination of wages and
working conditions. Furthermore, the instigation of macroeconomic wage determination
left little role for enterprise level institutions, workers= councils or local trade unions, in
wage negotiations. The role and function of trade unions and of the old workers= councils
had still to be clarifi ed and incorporated institutionally. This occurred through two processes,
the clarifi cation and elaboration of labour law in Slovenia, and the emergence of a
reinvigorated, albeit divided, labour movement which increasingly represented labour, as
a class, at the (Slovenian) national level.
594

LABOUR LEGISLATION IN SLOVENIA IN THE INITIAL TRANSITION PERIOD:
1990-1993
As we have noted, the federal legislation of 1988-9 abolished self-management and
introduced centralized collective bargaining within the constraints of government incomes
policy. The 1989 Yugoslav Law on Basic Rights of Employment Relations set out
contractual minimums for wages and conditions, the rules for strikes and regulations
governing employment contracts, including fi xed term contracts, hours, vacations, sick
pay and other such labour standards; but, most importantly, it replaced the determination
of wage and employment conditions through the institutions of self-management
with collective bargaining.
Collective bargaining was not new to Slovenia. It was introduced as far back as the
19 th century and was even introduced in communist Slovenia by legislation in 1971 under
which agreements were concluded in 1972. However, collective agreements fell by the
wayside during the period of contractual self-management after the later 1970s, until
reintroduced by the 1989 national legislation. [Skledar (1999) p. 10]
In1990 Slovenia introduced its own Law on Employment Relationships governing
collective agreements.. As with the previous federal legislation, the institutions for collective
bargaining and negotiation of collective agreements were not based on an individual
fi rm, single-union basis as in North America; nor did they begin with industry-wide,
regional or sectoral, multi-employer collective agreements as was common in many Western
European countries. Rather it was based at the central economy-wide level in the
form of two general collective agreements, one for all sectors of industry and the market
sector generally which was negotiated between peak labour and employer organizations,
and the other for the education, medical care, culture and the public service sectors. The
fi rst general market sector agreement was concluded in August 1990. Several Branch, or
industry-wide agreements were concluded the following year.
Slovenia amended its law and consolidated its labour and collective bargaining legislation
the following year in the 1991 Labour Code, a comprehensive piece of legislation
which included particularly restrictive conditions for layoffs for economic reasons, including
six months advance notice and severance pay equivalent to a half-months wages
for each year of service as well as onerous implementation costs. [Vodopivec (2004)
p. 294] This right to termination of employment for economic reasons, no matter how
constrained, in addition to mandatory collective bargaining, marked a tectonic shift in
labour=s position in the economy. As Haltiwanger and Vodopivec note, the reforms:
removed one of the key characteristics of the socialist system B job security, as the
state gave up its role as a guardian and provider of jobs, and workers were allowed to
be laid off, and enterprises to fail. Moreover, the reforms changed its previous wage
determination system that was based on administrative constraints and collective decision-making,
and introduced a market-based system .... [Haltiwanger and Vodopivec
(2002) p. 3]
Prior to these reforms, workers could only be laid-off for disciplinary and not economic
reasons. Furthermore, labour lost its management rights over the labour process
and the organization of work and working conditions. As a result, there was a decline of
the role and importance of workers= councils and a concomitant rise in the role of unions,
595

though their importance at the workplace level was highly limited by the centralization
of collective bargaining and the imposition of an incomes policy.
Nevertheless, many other constraints on the right of employers to layoff workers and
on the level and structure of wages and individual contracts of employment remained.
Although wages could vary somewhat based on the >success= (i.e. profi tability) of the fi rm
and the productivity or effort of the individual worker thereby providing a modicum of
wage fl exibility, the basic level and structure of wages were set by guidelines established
at the national level and a set structure based on skill and educational qualifi cations.
Termination of employment could be initiated by mutual consent, unilaterally by an employee,
or, for justifi ed economic reasons, unilaterally by the employer, though in this
case subject to notice of from one to three months for private employers (as provided in
their collective agreements), to six months for public sector employers.
The Labour Code which set out these constraints remained in effect in Slovenia until
replaced by the Employment Relationships Act passed in 2002 which came into effect
January 2003. The new Act relaxed some of the constraints but, for the most part, maintained
a fairly tight regulation of the labour market.
The legislative changes which abrogated self-management and introduced collective
bargaining also introduced trade union pluralism, thereby ending the monopoly position
of, and obligatory membership in, the offi cial communist unions grouped in the peak organization,
the Confederation of Free Trade Unions (Zveza Svobodnih Sindikatov Slovenije
or ZSSS). This complicated the industrial relations scene in the early 1990s because of the
growth of alternative union bodies, some associated with competing political and ideological
parties, others that were breakaways from ZSSS or organized among public sector
workers or specifi c regional or industry workers. 3 The question was, who was to represent
the workers in negotiations with the employers at the national level, the branch level,
and, indeed, at the enterprise level where more than one union had membership? Slovenia
did not go the >exclusive= majority union route practiced in North America but rather allowed
for multi-party representation under the Law on Representativeness of Trade Unions
passed in 1993 which set out minimum conditions for recognition as legal representative
bargaining agents for workers at the various levels of collective bargaining. These included
such general conditions as unions must be democratic organizations, have continuous performance
as trade unions, and proper fi nancial resources. In addition, minimum membership
conditions were stipulated, for national confederations, 10% of branch workers, and
for a specifi c branch or occupation, 15% of workers. These conditions were initially fulfi lled
by 16 branch trade union organizations and four confederations.
The abrogation of self-management and social property, of course, raised the contentious
issue of privatisation even before Slovenian independence. This issue became particularly
divisive after the election in Slovenia of the right-wing Demos coalition government
in the 1990 election, a coalition that favoured >shock-therapy,= the instant privatisation advocated
by American economists such as Jeffrey Sachs. This approach was incorporated
in the Sachs-Perterle-Umek Act put forward by Demos which promised a Amassive and
speedy privatization administered by the government and relying on the free distribution
3 Though originally, the division among the unions was based primarily on ideological politics,
as the industrial relations scene became more divorced from party politics by the late 1990s, the
political divisions decreased but were replaced by splits between manufacturing and industrial
(private) sector workers and public sector workers who participated in separate and distinct collective
bargaining systems.
596

of enterprise shares.@ [Mencinger (2004) p. 77] The social democratic opposition, however,
put forward its alternative, the Korze-Mencinger-Simoneti Act, which advocated a government
monitored, decentralized and gradual commercial privatization.
Labour was not happy with the Sachs approach since the government would end up
giving away ownership of enterprise capital which the workers considered >theirs=, the
result of accumulation taken from years of their own labour. In fact, as early as 1990,
the Confederation of Free Trade Unions (ZSSS), the reformed peak organization of the
former communist unions which previously had a monopoly on union representation
of workers, had actually advocated the privatisation of socially owned capital into institutions
Acollectively owned by the workers, especially in those enterprises, establishments
and institutions in which the employees have been acting as responsible co-proprietors.@
[ZSSS (1990) p. 6] Nor were they entirely happy with the alternative proposal
which would force workers to buy back the capital that they considered they had already
paid for and owned: Athe past work of the employees who contributed to the increase of
socially owned capital ... should be taken into consideration@ the labour confederation
maintained. [ZSSS (1990) p. 6] Furthermore, the unions, while supporting the abolition
of the existing self-management system, insisted that any new property rights regime
must maintain worker participation in economic decision making and in management. 4
[ZSSS (1990) p. 3]
In any case, the ensuing debate resulted in a compromise, the Ownership Transformation
Act of 1992, which Acombined the decentralization, gradualism, and diversity
of privatization methods of the [Korze-Mencinger-Simoneti] approach with the free distribution
of vouchers called for under the [Sachs-Pertele-Umek approach].@ [Mencinger
(2004) p. 77] This was a critical decision for labour because it allowed workers a signifi -
cant ownership share of privatised fi rms through internal buyouts, particularly in labour
intensive industries. 5 This resulted in a Apeculiar ownership structure with a signifi cant
portion of the former social property in the insiders B workers and managers B hands....@
By 1998, almost 42 per cent of privatised companies were estimated to be employee
owned. [Stanojevic (2001a) p. 1]
Recent critics of the gradualist approach to the transition from self-managed socialism
to market capitalism have argued that the slow rate of privatization and the fact that
the process effectively blocked the rapid emergence of external strategic owners and
the consolidation of ownership by large, active capitalists, retarded the restructuring of
the economy and consolidated the power of managers who were, in the main, the same
managers who had presided over the pre-privatised socially-owned enterprises. As a result,
Simoneti, Rojec and Gregoric complain, ASlovenian fi rms are often run by managers
who are in effect unaccountable, able to protect themselves against any kind of external
investor (or market) interference.@ [Simoneti, Rojec and Gregoric (2004) p. 234. See also
Sustersic (2004) pp. 403 ff; and Rojec. et al. (2004) p. 477.] These managers were also able
to fi nd allies among the ranks of the internal worker-owners who sought mutual protec-
4 AWe understand it as a right that is guaranteed to people to participate in management and
decision making about economic and social questions.... especially development in view of structural
changes and creation of new jobs, profi t sharing, fi nding new jobs and additional training,
working prospects and safety. Work and working results serve as a fi rm basis for participation of
the employees in management.@ [ZSSS (1990) p. 3]
5 More detail on the 1992 legislation and the subsequent history of the transformation of property
rights and their post-privatization distribution is provided in Chapter 3.
597

tion from the restructuring efforts of outside owners. Furthermore, these managers were
also, by law, members of the Chamber of Commerce (Gospodarska Zbornica or GZS)
which represented employers in negotiations with the union peak organizations for the
national and branch collective agreements. However, the relatively smooth transition,
the rapid economic growth and the strong and continuing increase in labour productivity
after 1993 provide little evidence that the gradualist approach did, in fact, do much, if
anything, to hamper restructuring and market reform.
Indeed, the gradualist approach was probably a necessary condition for enlisting
labour=s co-operation in the transition. This is the conclusion that Stanojevic arrives at as a
result of a number of careful studies of the evolution of the union movement as it developed
after the abrogation of self-management eroded the role and function of workers= councils.
The emergence of militant labour organizations and a wave of strikes led to a forceful, and
ultimately successful, claim by workers for an integral role in the planning of transitional
and post-transitional economic and social policy. As Stanojevic writes: APolitical exchange
[between labour and the centre-left governments and political and economic elite] was
transformed into an industrial relations system, which secured a >voice= for workers in decisions
on the nature as well as the dynamics of the transition to a market economy.@ [Stanojevic
(2003) p. 290. See also Stanojevic (2001a) pp. 12-15] This was manifest in the Law on
Ownership Transformation (1992) and in the Law on Worker Participation in Management
(1993) 6 . It should be emphasized that the Law on Worker Participation in Management
was, in fact, a continuum and a legacy of the previous self-management system. As Stanojevic
notes, A... in Slovenia there was no radical disconnection from the self-management
tradition: it was transformed into a codetermination system on the German model@ [Stanojevic
(2003) p. 291] However, the labour demand to be party to economic management at
all levels was most notably refl ected in the formation of the tripartite Social and Economic
Council that was constituted and began negotiations on a national social contract in 1994.
The following year, the fi rst social agreement was signed.
Thus, the >gradualism= of the transformation in Slovenia refl ected not only the prevailing
Slovenian social democratic ideology with its roots in its immediate socialist past, but
also refl ected the demand by an aggressive labour movement that the transformation not
take place on the backs of the working class. In short, >gradualism= can be considered
really as a codeword for the rejection of the neo-liberal transition trajectory imposed on
workers and labour markets in most of the other transitional countries of central and
eastern Europe B Athe fi nal >pay= for [Slovenian workers] for calming down@ and co-operating
in the promotion of a smooth transition. [Stanojevic (2001a) pp. 14-15]
598
THE STRIKE MOVEMENT AND THE RISE OF THE UNIONS
The achievement of a role at the economic management table and also in protecting
labour standards was not achieved without a signifi cant struggle by workers. This struggle
took the form of a rising tide of strikes and industrial actions from the mid-1980s until the
achievement of the legislation and institutions described above. These disputes were not
initiated by the old trade unions of the socialist era, though these unions ultimately benefi
tted from the industrial militancy which contributed to the emergence of a revitalized,
6 For details, see Chapter 3.

though pluralistic and divided, union movement. Again, they refl ected the worker ethos
inculcated in the socialist period.
It is important to see the re-emergence of the union movement in its historical context.
Unions in Slovenia, as in most of western Europe and North America, fi rst emerged during
the initial stages of industrialism and initially, among craft workers protecting themselves
from deskilling, wage reductions and job competition from new industrial-capitalist production.
In the Slovenian areas of the Austro-Hungarian empire, such labour organizations
began to form after 1870 when the laws prohibiting trade unions were abolished.
In 1871, the fi rst strike occurred, involving Tailors= Assistants. However, the unions were
soon fl oundering in the long depression after the world fi nancial collapse of 1873 and the
Austrian unions did not revive until the 1890s under the leadership of the social democrats
and, slightly later, under the Achristian@ (Catholic) umbrella. [Skledar (1999) pp. 4-5] The
fi rst organizations of explicitly Slovenian unions, under both social democratic and liberal
leadership, took place during the fi rst decade of the twentieth century.
During the interwar period, three streams of unionism B social democratic, christian
and somewhat later, communist B persisted and made some attempts at regional organizational
consolidation, though this was undermined somewhat by factional divisions
and by the increased centralization of control from Belgrade during the Yugoslav royalist
regime. In any case, with the triumph of the communists after the Second World War and
the progressive development of self-management, the unions found themselves in an
entirely new context and with a much different and diminished role. As Skledar notes:
AUnder self-management, where workers had all formal power, trade unions had less
importance in representing the collective interest of employees and were more important
in protecting workers against the unjustifi ed behaviour and decisions of managers.@
[Skledar (1999) p. 6] Furthermore, Slovenia, which maintained considerable independence
from Belgrade, developed its own state social security system modelled on western
European countries, which was not tied to union-management agreements as was the
American system. In the last stage of contractual self-management, the Slovenian social
security system became largely incorporated into the enterprise-centred self-management
system under the control of workers= councils rather than the unions. All of this, of
course, changed when self-management and social property were abolished.
Change was already in the wind, however, before the system formally ended in 1988-
9. As early as the mid-1980s a wave of strikes began to sweep Slovenia. The issue of
strikes has always been somewhat controversial in communist economies. In the etatist,
centrally planned economies of the Soviet Union and Eastern Europe, workers= interests
were highly fragmented and the labour process highly atomised. Unions were integrated
into the management structure as > transition belts= between management and workers.
Thus strikes were construed as political actions directed, sometimes in concert with managers,
against the (workers=) state rather than as industrial protests against management.
Therefore, they could not, and were not, tolerated.
In Yugoslavia, on the other hand, the position of labour organizations within the enterprises,
both unions and the semi-autonomous workers= councils, was quite different.
Stanojevic argues that workers were not exposed to the pressures of central planners
but rather to enterprise managers and directors. In successful fi rms, workers and their
organizations co-operated with managers, but in unsuccessful companies they coalesced
with the state political elite against the managers and directors and were not reluctant to
go on strike, often with the explicit support of the local political elite. This produced a
cleavage between managers and workers not unlike that in capitalist systems.
599

Indeed, the decade long strike wave that persisted from the 1980s into the transition
period, Stanojevic argues, provides the thread of continuity between Slovenian
>communist= industrial relations and that which developed in the early years of the
transition. The result, he writes, was a Akind of >proto-capitalist= interest division (labour
vs. capital) in Slovenian >communism=@....[with] Athe main cleavage ... between
directors on one hand and workers and the state on the other.@ Hence, the political
elite was forced to guarantee job and social security for workers in exchange for political
support. This pressure was not through social unrest but because Astriking workers
permanently reminded Yugoslav >communist= elite on her >contractual= obligations.@
[Stanojevic (2001a) pp. 2-4] However, as the state >retreated= from the economy in the
late 1980s, Athe coalition between workers and the state disintegrated, but the interest
confl ict between workers and directors, which had already been initiated in Slovenia,
fi tted quite well into the >post-communist= order.@ [Stanojevic (2001a) p. 5]
In any case, the rise in the frequency and the volume (workers involved) of strikes began
in the mid-eighties and reached a peak in the crisis years when the self-management system
was being abandoned, with the ensuing depression and Slovenia=s move to independence. It
only abated after the reform legislation was passed incorporating the process of transitional
gradualism and guaranteeing labour and, more explicitly, the unions, a place at the management
table, both within the fi rm and at the macroeconomic level. (See Table 5.1)
Table 5.1
The Strike Wave
Slovenia: 1980-2000
Year Strike Frequency Year Strike Frequency
1980 30 1990 200
1981 62 1991 200
1982 47 1992 193
1983 18 1993 132
1984 96 1994 109
1985, 100 1995 125
1986 104 1996 129
1987 163 1997 99
1988 228 1998 42
1989 232 1999 26
2000 30
Source: Stanojevic (2001a) pp. 5-6,
However, it was not only the strike frequency that swelled in the closing years of
the 1980s and into the post-communist period. Though the number of strikes declined
slightly after 1989, the number of workers involved and the duration of strikes increased.
More importantly, they peaked in 1992, the year the transitional depression
reached its trough and the year the debate over the path of transition was resolved in
favour of a measured pace of transition that allowed labour and its unions a role in
economic management. Stanojevic=s evidence in this regard is convincing.
600
In the year 1992, when strike frequency was still extremely high, the size of strikes
was largest in the twenty years long period and defi nitely largest in the whole history
of labour movement in Slovenia....

It appears that the evidence reveals that the real peak of the strike wave was not
reached at the end of the 80’s, when the frequency was highest, but in >post-communist=
Slovenia in year 1992 when in almost 200 strikes the participation was highest
and working days lost absolutely highest within the two decades long period.... [After
1992] strikes in Slovenia sharply decreased within one year period in all dimensions
approaching the earlier pattern of small strikes, but this time as signifi cantly longer,
more protracted actions than in >communist= period.@[Stanojevic (2001a) p. 7-8]
In short, after 1992, strikes began to more closely resemble that of the industrial relations
pattern in western European capitalist countries rather than the >political= strike
pattern that had prevailed in Slovenia in the lead up to 1992.
The majority of strikes in the period after the strike peak could be classifi ed as defensive,
resulting from the failure to pay wages, or delay of wage payments, by fi rms in fi nancial
diffi culty because of the economic turmoil of transition. Statistics collected by ZSSS for
the period 1994-97 indicate that almost two thirds were for late or non-payment of wages
and a further one-fi fth for other wage related complaints. [ZSSS (1998) p. 129] The majority
of these were concentrated in labour-intensive manufacturing industries (metals and
electrical equipment, textiles and leather, wood products) and in construction which bore
the brunt of the economic dislocations from the systemic changeover.[(See tables in ZSSS
(1998) pp. 126, 127, 129.]
However, as recovery proceeded and the economy began to expand, the unions appeared
to become more aggressive and the strikes took on a more offensive character,
at the same time shifting from the goods producing sector to the service sector and, in
particular, to professional groups within the public sector which were actively seeking
a redistribution of state income. [Stanojevic (2001a) p. 8] The most high profi le action
initiating this new phase was the doctors= strike for higher pay in March of 1996. It was
followed by industrial action by schoolteachers, kindergarten workers, civil servants,
judges, university and research institutions employees, and railway and air traffi c control
employees. The resulting wage settlements in this non-tradeable service sector created
problems for the tradeable goods-producing sectors exposed to both export and import
competition and constrained by the prevailing incomes policy. Thus, they became a challenge
to the new industrial relations system.
The strike wave was both a manifestation of the tensions and dislocations resulting
from systemic change and the resulting economic problems; but it was also the agency by
which the unions were revitalized and their function and importance transformed, in the
process giving birth to a new industrial relations system. Trade unions were decidedly
secondary players in representing workers under self-management. Direct representation
of workers= interests in wages and conditions resided primarily with the workers=
councils with the unions relegated largely to a social and service role. Union led strikes,
therefore, were not contemplated as either necessary or even compatible with self-management
and there was no legislation to provide for such institutionalized industrial confl
ict. Indeed, unions were, for the most part, hostile to strikes and institutional support
for strikers was rare. As a result, most strikes were Aspontaneous, fragmented and weakly
supported or even without any support within the companies.@ [Stanojevic (2001a) p. 9]
Yet strikes did exist, though they were mostly short-lived protests refl ecting what may
be considered legitimate grievances against directors, and, as a result, had at least tacit
support from workers= councils. Strikers often also sought, and received, support from the
601

political elite, whose political power base was tied to industrial labour, in a kind of coalition
against the managers. In short, strikes became a form of labour-management confl ict
in which workers, with the support of the political elite, were frequently successful, despite
the strikes= Asmallness, defensive character and implicit illegality...,@ though, given
the persistent infl ation at the time, real gains from strike action usually proved transitory.
[Stanojevic (2001a) p. 9]
This pattern began to give way in the strike wave of the 1980s and early 1990s. The decline
in the labour-political elite connection as the state increasingly distanced itself from
the economy and the workers, meant that the strikes became more and more directed at
the state and the political elite rather than at the managers. At the initial stage, however,
the unions continued to remain relatively passive in organizing or supporting industrial
action, if not actually opposing strike action. 7 But by the end of the 1980s the union role
began to change as new, independent unions began to challenge the monopoly position
of the offi cial communist-era unions in the ZSSS. Though the unions, both the ZSSS and
the other, competing unions, may not have initiated or led the rising number of strikes,
they increasingly gave them their organizational support, focussing more and more on
every-day, economic grievances such as failure to pay wages or unauthorized redundancies,
rather than on ideological issues. Given the turbulence of the labour market transition,
the rising unemployment and the number of insolvent or fi nancially compromised
enterprises, the frequency and intensity of strikes continued to rise until 1992.
The question is why the strike wave peaked in 1992 B despite rising unemployment
and falling real wages B and why it began to moderate after 1992 until by the end of the
decade the incidence of industrial disputes reached levels comparable to the pre-strike
wave period at the end of the 1970s? As Stanojevic has argued, strikes prior to 1993
had in essence a defensive, political motivation; after 1993, an increasingly aggressive,
economistic character. [Stanojevic (2003) p. 289] The dividing line was the completion
of the key legislation defi ning and regulating the emerging Slovenian capitalist system
in a manner acceptable to labour; including the 1992 law on ownership transformation
of enterprises, the 1993 law on worker participation (co-determination), and the constitution
in 1994 of the tripartite Social and Economic Council (economic corporatism).
What they did was incorporate in law the very interests of workers that were the prime
issues motivating the strikers. Of these, the law on ownership was perhaps the most
signifi cant because it allowed workers to become majority owners of many, mainly
labour-intensive, fi rms.
In short, the legislation and the labour market institutions that resulted which incorporated
the gradualist approach and much-criticized labour market rigidities (centralized
collective bargaining, strong position and role of trade unions, strict regulation of the
labour market) was the price the political elite paid to bring an end to the rising tide of
industrial strife, confl ict which refl ected opposition to the re-institution of a class-based,
free-market economic system. In Stanojevic=s words,AThe fi nal >pay= for >calming down=
was signifi cant deviation of the Slovenian industrial relations system from pure neo-liberal
trajectory.@ [Stanojevic (2001a) pp. 14-15; see also Stanojevic (2002) pp. 250-1]
The years 2002-2003 were also a turning point in another aspect of the labour market
situation. The depression reached its deepest level and unemployment its highest level
in 2002. In mid-2003 the economy began to recover and unemployment to fall, aided by
7 As Stanojevic notes, however, the unions did a bureaucratic service in systematically recording
strike statistics. (Stanojevic (2003) p. 292)
602

massive social transfers and expenditures including generous early retirement programs
and encouragement of employment in informal economic activity without loss of unemployment
benefi ts; and by high wage and salary increases. On the other hand, increased
employment was slow in materializing. Nevertheless, the establishment of a new regime
in labour-capital-state relations, a new system of corporatist industrial relations, and a
revised mechanism of labour and union participation in economic management, all encapsulated
in the legislation and institution building of the 1991-1994 period, provided
the labour market framework for economic growth and relative industrial peace for the
following decade culminating in membership in the European Union.
THE NEW SYSTEM OF INDUSTRIAL RELATIONS
In the period 1988 to 2004, as we have noted, the institutional framework of the socialist
self-management system was abolished and in its place was constructed a new
system of industrial relations. Moreover, it was put in place under political and economic
pressure from workers, initially through the spontaneous strike movement, but increasingly
through the involvement of a re-emergent and strengthened union movement. This
political and economic pressure ensured a legacy from socialist self-management. This
took the form of a high degree of worker ownership in traditional, labour-intensive industrial
fi rms and in worker participation in management at both the micro (enterprise)
level and macro (economy wide) level. The formal institution at the enterprise level was
co-determination; at the economy wide level, the essential institutions were an inclusive,
centralized collective bargaining system, and, secondarily, corporatism, formally
enshrined in the Social and Economic Council.
Furthermore, after 1992 Slovenia was governed more or less continuously by centreleft
or centrist coalitions which were sympathetic to, and willing to dialogue and consult
with, the unions thereby ensuring labour=s partnership in post-independence economic
and social policy. Moreover, both the legislative and administrative arms of these governments
were experienced and competent, incorporating many of the personnel that made
up the socialist elite and bureaucracy that had guided Slovenia=s economy through the
period of the Yugoslav crisis. Importantly, these governments and their administrators
did not indulge in the corruption and kleptomaniac behaviour that plagued so many
post-communist governments in other transitional economies. For all these reasons the
transition took a course that has been described as >gradualist= B perhaps more accurately,
>social democratic= B rather than neo-liberal.
At the centre of this transition in the labour market was the new system of industrial
relations. Its evolution can perhaps be best analysed by looking fi rst at the >actors=
(unions and labour organizations, employers and their organizations, governments and
other agencies) in the system, how and under what rules and contexts they interact, and
what are the outcomes, the >web of rules=, produced by the system. 8 We have already discussed
in some detail the economic, socio-political and ideological contexts in which the
system developed and the legal and legislative framework devised to contain and institutionalize
the inherent confl ict between the interests of labour and capital in a capitalist
system. We will now turn to the evolution of the major actors in the system.
8 This is the traditional North American analytic approach based on the original model advanced
by John Dunlop in 1958 (Industrial Relations Systems (New York: Holt)) to which many subsequent
elaborations and modifi cations have since been made.
603

604
THE ACTORS
The trade unions had a somewhat ambiguous role in the period of self-management
since, formally, the workers= councils were responsible for the collective interests of the workers,
including the determination of wages and their distribution. Unions were relegated to
the roles of protecting workers and their self-management interests from arbitrary or unjust
management action and in organizing and providing social and recreational activities and facilities
for their members. [Skledar (1999) p.6] Membership in the formally recognized, communist-based
unions was mandatory and universal.
All of that began to change after 1988 when the old system was abandoned, collective
bargaining and the labour contract was charged with the determination of wages
and benefi ts, while, with the acceptance of the principle of union pluralism, obligatory
membership in the ZSSS unions was eliminated. Union pluralism, of course, raised other
complications with the collective bargaining system by raising the issue of who was to
speak for labour at the bargaining table since a number of new unions which sprang up
to challenge the >old reformed= ZSSS were ideologically-based, political opponents of the
old union structure. Further, there were quite a large number of new unions each competing
for members by militant action which, in part, accounts for the rapid rise in wages
in the early nineties. As we noted earlier, the issue of who could represent workers was
settled by the 1993 Law on Representativeness of Trade Unions. Under the provisions of
this Act listed above, four confederations and 16 branch organizations qualifi ed. [Stanojevic
(2000a) p. 29]
The unions have their base in the individual enterprise and more than one union
could be represented in any enterprise. However most were also federated at the branch
(industry) and national levels, and in one case, at a regional level. In some cases, particularly
in the public service, professional, occupational and independent unions were also
formed, mainly as breakaways from the ZSSS. In 1994, the year after the union representation
act was passed, total union membership density was around 60 per cent, though
considerably higher among blue-collar workers (an estimated 76 per cent) than among
white-collar workers (55 per cent). [Skledar (1999) p. 9] Of these union members, almost
half were members of ZSSS-affi liated unions, while the remainder were spread between
three other confederations, the right-wing Independence confederation (Neodvisnost B
KNSS) formed in 1990, Pergam, a ZSSS breakaway of pulp, paper and printing unions
and the Confederation of Trade Unions >90, an Adriatic regional breakaway from ZSSS,
and the independent unions. Although these independent unions, if they had suffi cient
members, are recognized at the fi rm and branch level, they have no representatives at the
level of the Social and Economic Council.
According to Stanojevic, in the second half of the decade union density fell to around
43 per cent of the workforce, mainly at the expense of Pergam and KNSS whereas ZSSS
maintained and even increased its membership dominance. 9 [Stanojevic (2000a) p. 28]
However, given the centrality in the industrial relations system in Slovenia of the social
contract and the national collective agreement, for which the central confederations
are the representative union negotiators, the importance of the ZSSS in the system becomes
manifest since it speaks with, by far, the loudest voice. Furthermore, after 1992
the unions, despite their fragmentation, have co-ordinated the negotiating positions and
9 A somewhat different picture which does not show declining union density or rising ZSSS
dominance, however, is provided by Luksic (2001) p. 55:

their selection of representatives on the Social and Economic Council. [Skledar (1999)
p. 9] In any case, as the decade wore on, ideological divisions softened as all the unions
became increasingly >economistic=; that is, concentrating more and more on common
economic gains rather than on more political goals. The split that developed within the
union movement as the decade progressed was not one based on political ideology but
rather between the public and the market sector unions which has resulted, de facto, in
two separate industrial relations systems, one in the private (market) sector and another
in the public sector with different wage setting criteria, legislation and institutions.
Though centralized bargaining is the defi ning feature of the Slovenian industrial relations
system, it has not eliminated the role of the union at the enterprise or branch
level. Indeed, industrial relations have developed a two sector, three tiered system. In the
private sector, as well as the national negotiations and a single collective agreement setting
out national minimums for all industries, negotiations also take place at the branch
or industry level. Agreements reached at this level, which apply to all employers in the
branch, must provide wages and benefi ts no lower than those provided in the national
agreement but may, of course, provide for better provisions. This provides a degree of
fl exibility for more successful industries and incentives for labour market mobility by
providing such things as higher wages through profi t sharing without running counter
to the incomes policy contained in the social contract designed to control infl ation. This
is even more important for individual enterprises which can bargain fi rm-level contracts,
again with benefi ts superior to the branch and national agreements, providing management
of more successful fi rms with incentive tools to attract and motivate workers.
Moreover, in the face of escalating competitive pressures and a highly regulated external
labour market, local bargaining allowed for the formation of highly motivated surviving
coalitions of workers and managers which Asecured effi cient mobilisation of internal
resources, substituting work intensifi cation for technological renewal.@ [Stanojevic (2002)
p. 256] That is, local unions have also been the instrument for negotiating the work rules
that have provided employers with the fl exibility to reshape their labour processes and increase
the intensity of work and per worker productivity that has allowed Slovenian fi rms
to remain competitive while still granting real increases in wages. [Stanojevic (2005)]
However, this normally extends only to those fi rms that have been successful in the
transition.
Slovenian trade unions do not co-operate with unsuccessful managers. The key
condition of co-operation is company success. This stance explains the >islands= of cooperation
and high trust relations within the industrial relations system in Slovenia.
The >islands= are clearly limited to successful companies.
Among unsuccessful fi rms, that is those which are unable to offer higher wages or
benefi ts, he adds, Athe trade unions are more concerned with control, to ensure that
Union Membership by Confederation
Year Total Membership ZSSS Independence-KNSS PERGAM Confederation >90
(%) (%) (%) (%)
1992 657,662 66.3 24.6 2.8 6.3
1994 683,648 64.3 23.8 4.6 7.2
1997 732,443 59.5 23.1 12.0 5.5
However, the overall dominance of ZSSS, the only confederation affi liated to the European
Trade Union Confederation, is readily apparent.
605

management adheres to standards set out in sectoral and general collective agreements.@
[Stanojevic (2000a) p. 30]
Furthermore, the local union situation was made more complex by the law on worker
participation in management (co-determination) passed in 1993. The unions recognized
that the works councils, patterned in the legislation on the German model, gave them one
more instrument to consolidate their position in the workplace and to increase their infl uence
on the privatization process. The legislation further enhanced the role of the unions
by providing that the initiative to form workers councils was to come from the workers
themselves with the result that the unions became key factor in the formation of the councils.
In short, the councils became the organization of the union mediating workplace relations
and rules while the larger union bodies were more focussed on wage negotiations.
The underside of the legislation, however, was that new fi rms that, for the most part, did
not have unions, also did not have works councils. [Stanojevic (2001b) p. 15]
A system of collective bargaining required not only recognized union representatives,
which was clarifi ed by the 1993 Act, but also recognized employer representatives. This
remained a somewhat ambiguous issue throughout the transition process and, indeed,
remained so as Slovenia entered the EU. Under self-management, all enterprises and
crafts were organized into para-statal chambers with obligatory membership. For major
employers, they were grouped into the Chamber of Commerce and, for smaller enterprises
and independent crafts, the Chamber of Crafts. However, these chambers were,
in fact, the same organizations, and by and large with the same membership, that had
prevailed under the socialist self-management system. Yet under the new collective bargaining
system, the Chamber of Commerce and of Crafts became the employer bodies
responsible for negotiations of the new collective agreements and for negotiations at
the level of the national social contract, at least as long as management of enterprises
remained under the old managers while ownership issues remained unresolved. Even
when privatization took place, much of ownership remained either worker owned or
under the control of the government (state) owned investment funds, in which case the
earlier management system was maintained.
Critics thus maintained that little was changed on the management side from the
earlier self-management system and, as a result, there was no effective transition to capitalist
industrial relations. Even, perhaps surprisingly, the International Labour Organization
agreed that the employer organizations were not independent and called for new,
independent organizations of employers. The result of this criticism by the ILO was the
formation of new employer organizations, the Slovenian Employers= Association (ZDS)
founded in 1994 and which by 1997 had 1,618 members employing around 60% of market
sector labour force and representing 49% of capitalist equity; and the small business and
craft sector represented by OGISTTA, founded in 1994, which by 1997 had 2,730 members
among smaller employers. [Skledar (1999) pp. 9-10] Nevertheless, the Chamber of Commerce
remained the most important representative of capital in negotiations throughout
the transition period. The old exclusive chambers retained their dominant position in the
bargaining structure which provided a measure of stability to the new collective bargaining
system, but also provided its critics with a refrain that nothing had changed. Still,
because of the compulsory, inclusive membership in the Chamber, agreements made by
that body at the national level cover the whole of the economy without the necessity of
legislation providing for the extension of core collective agreements to the national level
or to an industry as is the case in a number of other European countries.
606

THE CORPORATIST INSTITUTIONAL CONTEXT
The evolution of the industrial relations system in the recovery phase after 1993 was
profoundly infl uenced and shaped by the corporatist institutional context provided by
the 1993 Law on Employee Participation in Management, which contained German-style
codetermination, (see chapter 3), and which was reinforced by the 1994 EU Directive on
the establishment of European Works Councils (EWC) 10 ; and the creation, also in 1994,
of the Social and Economic Council (SEC) which provided for tripartite negotiations of a
social contract at the national level. This institutional context was founded on the understanding
that workers were entitled to participate in the management of the economy,
not only at the enterprise or industry level, but also at the level of the macro-economy.
Thus, in effect, there were fi ve levels of labour participation in decision making, or
in negotiations between labour and capital: works councils at the shop fl oor level, trade
union collective bargaining at the fi rm, branch and national level, and negotiations at
the national level between the peak union confederations, employers organizations and
government. Indeed, there were signifi cant overlap between the two national level negotiations
such that the major union confederation, ZSSS has proposed that the national
level of collective bargaining be eliminated since it was basically a duplication of the SEC
negotiations. However, this was opposed by the smaller and independent unions that
were not represented at the SEC.
The multiple levels of negotiations also created problems for the local unions. Since
incomes policies and wages were adopted at the top levels of negotiations, the local union
leadership at the enterprises had little scope for affecting wages or working conditions. As
Stanojevic explains, local union leaders are in direct contact with their dissatisfi ed members
but:
Simultaneously, they are >trapped= in a >social partnership= mechanism: the rate of
wage growth is regulated at mezzo and macro level. It means, that room for negotiations
at the workplace level is limited. Wages ...are not easy to improve. The union leaders
negotiate with managers, but real improvements in company wage agreements
are rare. [Stanojevic (2001b) p. 13]
As a result, there has been considerable worker criticism of their unions for their inability
to get better deals at the lowest levels.
The fi rst social contract in 1994 included an incomes policy that, until 1997, was implemented
by law which limited the overall wage bill growth of the enterprises. This was a
continuation of the practice under the previous system. In 1997 this was liberalized and no
limit was placed on the overall wage bill of enterprises, though laws did limit the growth
of managerial pay by linking its growth to that of workers= pay covered by collective agreements.
[Haltiwanger and Vodopivec (2002) p.12] Incomes policy, however, has since been
implemented through the tripartite and national agreements negotiated by the three social
partners, and has taken the form of limiting average wage increases to a slightly lower rate
of growth than that of expected labour productivity. In any case, since the mid-1990s, the
centralized collective bargaining system based on the SEC and the national agreements,
has been an effective and effi cient instrument in forging and implementing a national in-
10 Larger European multinational companies were required to establish a European Works
Council (EWC) for informing and consulting employees though, in Slovenia at that time, this affected
only Renault. [Skledar (1999) p. 13]
607

comes policy which, along with monetary and fi scal policy, was able to reduce the rate of
infl ation as Slovenia approached EU accession. This it was able to do while still reducing
the rate of unemployment and raising real wages, despite the restructuring of the economy
and resulting liquidation of fi rms, and redundancies of workers, that marked the transition.
(See the following chapter.)
608
THE STRUCTURE AND FUNCTIONING OF THE NEW INDUSTRIAL RELATIONS
SYSTEM
As briefl y outlined above, the peak institution in the new Slovenian industrial relations
system is the Social and Economic Council (SEC). It was formed, at the government=s
initiative, in April 1994 after it was proposed by the unions as a trade-off for labour=s acceptance
of, and co-operation in the implementation of, the government=s market-sector
incomes policy. The SEC is composed of fi fteen members, fi ve each from the union peak
organizations, the employers= organizations, and the government led by the labour and
social affairs ministry. One anomaly in the Council=s operations is that its incomes policy
agreements are also binding on the non-market sector even though the public employees
and their unions are not party to the Council=s deliberations At the branch and occupation
levels in the non-market sector, however, the government and the public sector unions
negotiate their collective agreements directly.
The fi rst social agreement was signed in 1995 and dealt with a wide variety of economic
and social development issues including labour legislation, wage, employment and
incomes policy, industrial relations, workplace health and safety programs and the collective
bargaining system, pensions, health insurance and the broad range of social policy
and social security issues. (Skledar (1999) p. 15) Labour, thus, was able to secure a voice in
regulating the nature and dynamics of the transition and Aenable long-term social partner
inclusion in the processes of pay determination and a range of other social and economic
policies.@ [Stanojevic (2000a) p. 29] Furthermore, parliament that year institutionalized
labour=s participation in managing the economy by requiring that all legislation directly
affecting the interests of the social partners be referred to the tripartite Council for its opinions
prior to being introduced into the legislature. [Stanojevic (2003) p. 290] The following
year a second general agreement was negotiated but the third not until 2003.. Between 1994
and Slovenia=s accession to the EU there have been three broad social contracts negotiated
and fi ve more limited agreements on incomes policies adopted.
The 1995 agreement involved a number of provisions directly affecting the industrial
relations system. Specifi cally it included a commitment to collective agreements for determining
wages and salaries, including in the public sector, price controls in the nontradable
sector to help control infl ation, a reduction in direct taxes, a legally enforceable,
national wage indexation system to protect workers= wages against infl ation but that, at
the same time, was aimed at gradually lowering the infl ation rate by holding increases
in real wages to a level below the increase in labour productivity. At the same time, employer
wage fl exibility was introduced by providing for up to 25 per cent of individual
company profi ts to be utilized for enterprise level collective bargaining. Management salaries
became exempt from the collective agreement and were provided for by individual
contracts. The 1996 Social Agreement built and expanded on the 1995 agreement with a

new emphasis on employment creation with fi scal restraint to dampen infl ationary pressures.
[ILO (2005) pp. a.3, c.1]
Perhaps one of the more important provisions of the 1995 and 1996 agreements was
the introduction of a national minimum wage, a provision that was subsequently incorporated
in legislation. The motivation behind the introduction of a minimum wage was
the growing inequality in labour incomes and the spectre of rising rates of poverty among
lowest-wage workers in the least competitive, mainly traditional, industries which were
now exposed to European competition and were denied the compensating subsidies provided
under the previous system. The fact was that, to prevent the least viable fi rms from
bankrupcy, the minimum basic pay provided for in the national collective agreement had
to be set so low that, for the lowest qualifi ed workers, their pay fell below the poverty line.
The minimum wage was the attempt to counter this problem.
This was not, however, without it problems since the new minimum wage was higher
than the basic wages contained in a number of the collective agreements pertaining to the
poorest performing fi rms and sectors. In part, this was because the minimum wage was the
total wage received by the worker, including various supplements, whereas the basic wage
did not contain these supplements, though the basic wage was by far the largest component
of the wage packet. [Haltiwanger and Vodopivec (2002) p. 12] Up to 1995, actual starting
wages had little relation to basic wages provided for in the collective agreements due to
differences in economic results for many enterprises. As Bole notes:Abecause of individual
allowances and differences in performance of enterprises, the starting-level wage set in the
Collective Agreement was even less important for the actual average wages. Only the worst
performing enterprises were constrained by the starting-level wage.@ [Bole (2002) p. 4] As a
result, the new minimum wage did not upset the collective bargaining system as much as
might be feared, and it did result in a fall in income inequality as the minimum wage rose
from around an average of 36 per cent of the average wage to around 40 per cent in the
years after 1995. [Vodopivec (2004) p. 495]
Furthermore, the minimum wage, which became incorporated in legislation in 1997
after the failure to reach a broader social agreement that year, also provided for automatic
indexation by 85 per cent of expected infl ation (100 per cent if infl ation was greater
than expected), a rate of indexation which mirrored that in the broader wage agreement.
However, in the case of the minimum wage, it was to be raised by an additional increase
equal to the rate of real GDP growth in the previous year. The goal was eventually for the
minimum wage to reach 58 per cent of the average wage in manufacturing. [Bole (2002)
p. 4] By 2000, the minimum wage had, in fact, risen to 52 per cent of the average manufacturing
wage. [Sicherl (2005) p. 149]
The broad social contracts of 1995 and 1996 were supplemented by annual income
agreements. However, in 1997 and 1998 a new general social agreement and the tripartite
incomes agreement were blocked by the employers who refused to agree to what they considered
Anon-sustainable levels of non-cash allowances.@ Given the failure to reach a formal
agreement, the government stepped in and legislated wage policies based on the previous
agreements and on subsequent SEC negotiations. The failure to reach agreement was also
why the government introduced the law On Minimum Wage and the Adjustment of Wages
which was subsequently incorporated in the broader wage policy agreement of 1999. [Bole
(2002) p. 4] A new incomes agreement was subsequently reached in 1999-2000 and the
third, and broadest, general social agreement in April 2003 covering the years 2003-2005.
609

The 2003-2005 social agreement expanded on the earlier agreements particularly in
the areas of social security, health and safety, and education and training and incorporated
the narrower incomes policy agreement reached the previous year. The central
focus of the new agreement was to improve economic competitiveness through innovation
and investment in human resources in order to form a knowledge-based society as a
precondition for accommodation to the changes in technology and to participation in the
EU and world markets. (Slovenia (2003) p. 5) Indeed, the preoccupation with vocational
and professional education and the cult of life-long learning was the central focus of the
agreement. Health insurance was confi rmed as a central and enduring responsibility
of the public authority. Also included in the agreement was tax relief for lower income
earners. Underpinning the whole agreement was the recognition that social dialogue
and industrial peace, along with the supporting policies of labour standards, industrial
relations, infl ation control, wage, housing and social welfare policies agreed between the
social partners, were necessary ingredients in promoting a competitive economy.
Fiscal restraint was also incorporated in the social agreement, though this seems to
refl ect the increasingly neoliberal orientation of economic policy in Slovenia dictated
by entry into the EU and the Maastrict requirements rather than refl ecting any national
economic priorities. The preoccupation with reducing the share of government expenditures
and revenues in the GDP and with privatisations does not appear to be justifi ed by
comparisons with other EU countries or with levels of public debt or fi scal imbalances.
Rather, it appears to be entirely ideological. On the other hand, the pursuit of privatisation
included a recognition of labour=s interest in participation. 11 Furthermore, the
agreement also recognized the need for >family-friendly= employment policies to reduce
discrimination against women. [Slovenia (2003) p. 33]
610
NATIONAL COLLECTIVE AGREEMENTS
General collective agreements at the national level between employers, unions and
the government represent the second level of labour market negotiation and regulation
in Slovenia. They are the primary instrument for the implementation of incomes policy,
within the guidelines now established by the SEC, and were legislated as the basic level
of industrial relations by the labour code in 1989. The general collective agreement for
the market sector makes the social agreement more concrete by regulating the determination
of pay and the structure of the basic wage, and employment and working conditions.
Included in the agreement are such matters as hours, holidays, probationary periods,
job security, trade union rights and activity, guaranteed allowances, shift premiums,
seniority premiums, holiday pay, profi t sharing, sickness and injury pay, and education
11 Employers shall encourage and support worker education and training; in wage policy to
Alook for new forms of rewarding employees in order to insure better satisfaction ... and closer ties
between employees and the company@ to increase competitiveness.
Unions shall Astrive to ensure better informing and more intensive participation of workers in
decision-making, aimed at contributing to improved worker awareness and understanding regarding
the needs of the company, increasing the possibilities for effi cient adaptation to changes in the
organisation and technology in the working environment.... [Unions are to participate] in regional
development programmes ....[ and] encourage education and training of employees@ with respect
to these regional development programmes. [Slovenia (2003) p. 14]

and training, including apprenticeship training. The contract is binding on all employers
in the commercial, or private, sector. The wage package is normally determined annually
as an appendix to the agreement, but the majority of the contract, including the structure
of basic wages, is in the form of a multi-year agreement. In earlier years of rapid infl ation,
wage adjustments occurred more frequently than annually and were based on past infl ation.
When the VAT tax was introduced in 1999, for instance, two wage adjustments were
allowed anticipating the infl ationary effect of the VAT on real wages amending the 1999
wage policy agreement that otherwise provided for a once a year adjustment of up to 85
per cent of past infl ation. However, the new wage agreement reached in 2001 provided
a formula incorporating anticipated, rather than past, infl ation in order to determine
annual adjustments. The increments are determined on a negotiated basis incorporating
the government=s incomes policy stipulating that wages be adjusted upward by 85
per cent of the anticipated increase in prices as calculated by a measure incorporating
Aanticipated movements in consumer prices excluding alcohol and tobacco, anticipated
infl ation in the EU, and the anticipated exchange rate of the euro, as proposed by the
Social Agreement@ plus a real wage increase that is to be at least one per cent below the
anticipated increase in labour productivity. [Mirror (April, 2004) p. 13]
The current general collective agreement came into effect in 1999 and runs until 2005.
The most recent market sector income agreement covers the period 2004-2005 and introduced
a new element in the adjustment mechanism, the increase of a fi xed rather than
percentage increase in the wage adjustment such that all wages would rise by the agreed
adjustment amount as determined at the branch agreement level. This, to some extent, will
reduce the problem of the legislated minimum wage rising above the basic wages in the
general agreement and in the lower-paid branch agreements. 12 All provisions and tariffs
in the agreement are minimums that must be respected by collective agreements at the
branch (industry) or individual employer level. [General Collective Agreement 1999-2005) 13 ]
One peculiarity of the Slovenian general collective agreement, which it inherited from
the previous, self-management system, is its formal and rigid regulation of the structure
of basic wages based on the education and/or the skill level required for the job. The
agreement establishes nine tariff classes. All positions or jobs within an organization are
systematically defi ned in order to allocate each job to one of the nine tariff classes. These
classes, defi ned by their education and skill requirements, are:
Tariff Class 1 B simple work requiring no previous skills; primary school completion
not required ; (1.00)
Tariff Class 2 B less demanding work; primary school education required plus some additional
education/training; (1.10)
Tariff Class 3 B medium demanding work; two years of secondary, vocational/professional
school required; (1.23)
Tariff Class 4 B demanding work; two and a half years of secondary, lower professional,
education or training is required; (1.37)
Tariff Class 5 B more demanding work: three years of secondary education with professional
certifi cation or 4-5 years secondary schooling required; (1.55)
Tariff Class 6 B very demanding work; high school graduation with undergraduate university
degree certifi cation; (1.85)
Tariff Class 7 B highly demanding work; a university degree is required; (2.10)
12 For a discussion of this problem, see IMAD, Autumn Report 2004, pp. 59-61.
13 English Translation by Uros Pinteric.
611

Tariff Class 8 B most demanding work; a degree of Masters of Science or of Arts is required;
(2.50)
Tariff Class 9 B most important and demanding work; a PhD or Doctorate is required
(3.00).
Differentials between these bases range from, at the low end, around 10 per cent to
the high end, of around 20 per cent. This is indicated by the index (in brackets above)
of the basic wage in each tariff class relative to the base rate in tariff class 1. In addition,
wages under the general agreement are increased for years of work (seniority) with an
employer by 0.5 per cent per year plus bonuses for ten, twenty and thirty years of continuous
service. [General Collective Agreement 1999-2005, Articles 47, 51] Provision is also
made for shift work, weekend work, dangerous or dirty work, though these specifi c premiums
are negotiated at the branch or fi rm level. Included in the agreement is additional
holiday pay which is set at a level of no less than the minimum wage.
However, the rigidity in the wage structure implied by the listed tariff classes is more
apparent than real. Indeed, the wage structure is much more fl exible because, within
the tariff classes at the branch or sector level there are a number of wage levels. That is,
within each tariff class, wages can be altered by up to thirty or forty per cent. Thus, there
is evidence of highly structured internal labour markets operating within the Slovenian
economy. Furthermore, provisions for payments based on the success of the fi rm or of
the individual worker (payment by results) can add signifi cantly to wage differentials
both within individual fi rms and between industries or branches, though, again these
payments must be negotiated at the branch or fi rm level. (Articles 45, 49) The collective
agreement also provides for extra payments to individual workers for their individual
contributions to innovation equal to three per cent of the economic benefi t accruing to
the enterprise. (Article 53)
General issues of job security, transfer and discipline are dealt with in Articles 14-18
while those relating to on the job education and training and probationary periods are
included in Articles 10-13.
612
BRANCH AND INDIVIDUAL ENTERPRISE AGREEMENTS
The third level of bargaining is between the unions and employers only and takes
place at the branch or industry level. Within the market sector, there are twenty seven
branches which have concluded agreements from the early 1990s. In 2003, these branches
had negotiated 32 collective agreements. 14 Basic wages in six of these agreements,
primarily in traditional, competitive, labour intensive industries requiring low skilled
workers, refl ected the minimum level established in the general collective agreement but
the remaining twenty six had higher rates. Forestry had the highest basic rate with a 23
14 The branches with collective agreements were: 1. Agriculture and Food; 2. Forestry (2 agreements);
3. Coal mining; 4. Textiles, Clothing and Leather; 5. Wood manufacturing; 6. Paper manufacturing;
7. Graphics; 8. Journalism; 9. Chemicals and Rubber (3 agreements); 10. Nonmetallic
minerals; 11. Metals, Foundries and Electronics; 12. Electricity; 13. Construction; 14. Sales; 15.Hotels,
Restaurants and Tourism; 16. Railway Transport; 17. Roads and Highways; 18. Road Passenger
Transport; 19. Road Goods Transport; 20. Warehousing, Storage and Maritime; 21. General Post
Offi ce; 22. Banking; 23. Insurance; 24. Water utilities; 25. Real Estate (3 agreements); 26. Craft
Employers; 27. Private employers.

per cent premium over the general agreement rate. However, at the higher tariff levels,
coal mining, journalism, water utilities and real estate had the highest premiums at the
tariff 9 level of between 50 and 60 per cent over the general agreement. Indeed, the structure
of rates by tariff class varied considerably among the various branches refl ecting the
internal labour markets, skill structure and market forces operating in the respective industries.
Specifi c jobs in individual enterprises are slotted into the tariff structure on the
basis of job evaluation criteria established by the employer. Though the wage structure
so determined is >job-based=, fl exibility is provided for individual wage premiums by the
provision, as noted above, for individual bonuses based on the individual=s job performance
or the fi rm=s success. As Haltiwanger and Vodopivec note, though basic wages are
determined by job-specifi c qualifi cations and characteristics, actual wages have Asome
>idiosyncratic fl exibility= based on the >success= of the worker and the fi rm.@ [Haltiwanger
and Vodopivec (2002) p. 4] Branch collective agreements also provide for working conditions
and supplements that are unique to the specifi c branch or industry.
The fourth level of bargaining is between enterprise management and local unions
at the individual enterprise level with over one thousand such agreements in place in
the early years of the new century, mainly at the largest fi rms. These agreements permit
greater fl exibility in incentive wages and benefi ts by allowing individual allowances, bonuses
and overtime payments and profi t sharing, or >participation in results= such as the
increasingly popular >Christmas (or thirteenth month) wage.= [Bole (2002) p. 3] However,
the trend in recent years has been for the number of enterprise agreements to decrease in
favour of reliance on the branch agreements which are implemented by statute. [Stanojevic
(2005) p. 4] Where local agreements do not exist, management may substitute unilaterally
determined provisions providing, of course, they do not contravene or fall below
the minimums provided in the branch agreement. To be successful, however, any signifi -
cant accommodation to employer-introduced working conditions would normally require
the co-operation of the local union offi cials and members and, therefore, would become
the subject of informal workplace negotiations and agreements.
THE PUBLIC SECTOR
The industrial relations and collective bargaining systems in the non-market sector
are quite distinct and separate from that of the market sector. At the fi rst level, the negotiation
of the social agreement, the public sector unions are not represented even though
the agreement determines the general framework of incomes policy and the governments
fi scal policy goals which constrain public sector wages. The fi rst general collective agreement
for the public sector was negotiated in 1991 between the government, represented
by the minister of labour, and the public sector unions. It is amended annually by the
addition of annexes establishing the basic wage (tariff class 1) for each sector. As Bole
notes, the only connection between the market and non-market sectors is the presence of
the government at the bargaining table and in the determination of the overall incomes
policy. He describes the system:
The law of 1994 regulating the structure of wages in the general government was
the formal basis of the wage determination process in the non-market sector for the
period after 1995. The level of wages was determined (in every year) by starting-level
wage. Curbing general government spending had a direct effect on the low relative
613

614
level of starting-level wage in the non-market sector. While indexation was similar,
starting level wage were much lower than in the market sector. [Bole (2002) pp. 4-5]
The 1994 act was replaced by the Public Sector Wage System Act of April 2002,.which
continued the regulation of the wage structure and the rules for altering wage differentials
and which more clearly defi ned what constituted the public sector covered by the
provisions of the Act.
Public sector wage policy was thus made subordinate to fi scal policy goals, the prime
objective of which was to maintain balanced budgets and reduce the size of public sector
expenditure. However, the actual level of real bargaining over wages was much more
decentralized, occurring at the individual sector levels where the unions were also organized
on a more fragmented, professional and occupational basis. However, the lower
starting wages and the curtailment of public sector wages in the general agreement increased
the pressure from the public sector unions which bargained directly and separately
with the government for the determination of six sectoral, or branch, collective
agreements. 15 The pressure from the unions increased with the implementation of the
minimum wage which was tied not only to infl ation but also to increases in GDP, since
wage determination for a large segment of direct government employees was tied to the
minimum wage. [Bole (2002) p. 5]
Bole goes on to argue that, under this pressure, the government eventually gave in and
public wages rapidly increased. He argues that Aspending ministers usually were part of
the government bargaining teams .... [which] further eroded and weakened the bargaining
position of the government.@ However, since starting-level wages, wage structures
and wage adjustment mechanisms were regulated under the 1994 law, the Aenormous
increases@ in total pay came in the form of allowances and bonuses, particularly for some
of the high skill professions, resulting not only in rapid increases in the average public
service wage but also a Ahigh skill driven@ and permanent wage drift. [Bole (2002) p. 5]
This wage drift was triggered by a strike of the doctors= union FIDES in 1995 which
was followed by a large pay increase awarded to judges in 1996. Overall, in 1995-1996
public sector salaries rose by 15 per cent, almost double the rate of productivity growth
(7.7 per cent) and fi fty per cent higher than the average growth in wages and salaries in
both market and non-market sectors over the two year period (10.2 per cent). 16 The wagedrift
premium in public sector wages continued throughout most of the second half of
the nineties though narrowing a little in 1998-1999. [see Bole (2002) Figure 1] However,
public sector remuneration again began to widen its lead over the market sector in 2001
when public salaries rose 5.1 per cent compared with a national average wage increase of
3.2 per cent and productivity growth of 2.2 per cent.
This brought about renewed pressure from the government to reduce the compensation
of public sector employees relative to the private sector by slowing the rate of public
sector increases below those in the private sector. This was accomplished by a series of
negotiations and resulting laws and agreements with the public sector unions at the national
and sectoral levels. As a result, the share of public sector salaries in GDP fell from
15 The six agreements are: Research Activities; Doctors and Dentists; Health Care and Social
Security; Health Care Employees; Cultural Workers; and Education Workers.
16 Information on the 1995-6 and the 2001 increases was supplied to the authors by Miroslav Stanojevic
and are derived from Igor Klinar, Placni sistem v javnem sektorju in dolectivno dodatno pokojninsko
zavarovanje za javne usluzbnece, Unpublished Master=s Thesis, FDV, Ljubljana, 2006, pp. 54-56.

a post-1995 high of 10.9 per cent in 2001 to 10.4 per cent in 2002, at which rate it has stabilized.
The impact of these latest set of agreements is evident in table 5.2 which shows
that public sector wages rose a full 1.5 per cent per year less than private sector wages
between 2002 and 2004 and 2.4 per cent per year below the rise in labour productivity .
Table 5.2
Labour Productivity and Real Wages in the Private and Public Sectors, 2001-2004
Year Growth in Labour Growth in Growth in Private Growth in Public
Productivity Average Wages Sector Wages Sector Wages
2001 2.2 3.2 2.3 5.1
2002 3.7 2.0 2.3 1.1
2003 2.8 1.8 2.1 0.7
2004 4.5 2.0 3.1 - 0.8
Source: IMAD, Spring Report 2005, Table 17, p. 69.
The particularly low (i.e. negative) increase in public sector wages in 2004 was the
result of agreement with the public sector unions to forgo the August 2004 infl ation adjustment
in exchange for supplementary pension insurance. Nevertheless, at the end of
2004, average public sector gross wages were still almost a quarter higher than average
market sector gross wages [Slovenian Economic Mirror (February 2005) p. 14], though continuing
restraint agreements in the public sector are intended to shrink the difference.
INDUSTRIAL RELATIONS IN THE TRANSITION: AN APPRAISAL
The most important change in the transformation of the Slovenian economy beginning
in the late 1980s was in the labour market and its institutions involving a revolutionary
change in property relations in the productive sphere. That change was, of course,
from self-management of productive social property within a managed market system
to a capitalist labour market within a privatized and increasingly deregulated market
economy. What is perhaps unique about this transformation, at least in comparison with
other post-communist transitions, is how smoothly it occurred. Despite the sharp, but
relatively brief, post-independence depression that bottomed out in 1993, and the strike
wave from the mid-1980s to the mid-1990s, the institutional and economic transition in
the labour market took place without the awful economic and social turmoil and beggaring
of the working class that characterized the process in so many of the other transitional
economies. The question is, why?
The explanation suggested by the history detailed in this chapter has a number of salient
components. First is the institutional continuity that allowed labour market institutions
from the previous system to adapt to the new property relations. For instance, workers
councils, the prevailing labour-based institution of self-management, were maintained under
co-determination legislation though their powers were greatly reduced and restricted.
Trade unions, on the other hand, which had limited functions under socialist self-management,
emerged as the dominant instrument in protecting labour interests. This evolution
was made possible by the introduction of strong, centralized collective bargaining legislation
under which the unions were accorded a central role. However, it was the consolidation
of union infl uence and participation in economic management with the establishment
of the corporatist Social and Economic Council in 1994, that guaranteed labour=s co-op-
615

eration with the government and employers in implementing macroeconomic policies, in
particular incomes policies, that were instrumental both in promoting recovery and growth
and in protecting the workers from the worst ravages of the transition depression. As Bole
notes, Athe Social Agreement was essential in the fi rst years of transition, when pressures
on labour costs were high and corporate governance was weak. ... [It] diminished uncertainty
about the future path of crucial economic variables (labour costs and cost of living)
...[providing] a more stable economic environment.@ [Bole (2002) p. 3] The importance of
the social agreement, however, continued by maintaining the real growth rate in average
wages below the growth in labour productivity thus contributing to the reduction of infl ation
without reducing growth. [Hanzek (1998) p. 81]
The second component of the successful transition policy was the gradualist approach
to the transformation of property rights that rejected >shock therapy,= rapid privatization
and market and price deregulation, and which promoted labour participation
in enterprise ownership.
The result was unemployment and poverty rates below those throughout much of Europe,
a low level of economic, social and political instability and steady and quite impressive
rates of economic growth. [Sustersic (2004) p. 400] More recently critics have argued
that the gradualist approach has slowed required reforms and restricted market changes
and that this does not auger well for future competitiveness and growth. However, productivity
growth rates, even after entry into the EU, suggest this is not the case.
A third element in the successful transition of the labour market was the emergence
of a strong union movement, born in the strike wave from the late 1980s through the
trough of the depression. It was this reformed and competitive movement which protected
workers= interests while demanding, and receiving, a central role in the formation
of transitional economic policy.
However, there is another side of the growth of the union function that has begun to
worry those concerned with the development of human resource management within Slovenian
enterprises. Research based on the international CRANET network questionnaire studies
completed in Slovenia in 2001 17 indicate that direct participation of individual workers,
particularly manual and clerical workers, in the decision-making process in Slovenian fi rms
is very low, well below that in other European or transitional countries. At the shopfl oor level
there is little worker participation with regard to decisions about the organization of work.
ASlovenian workers are barely included in that type of decision making..[and] compared to
their counterparts in other transitional countries, almost totally excluded from decision making
about strategy and fi nancial issues.@despite the high and >dual= level of worker representation
in unions and works council. [Stanojevic (2002) p. 255. See also Stanojevic (2006) pp.
162-165; Nadoh and Podnar (2006) p. 23] On the other hand, communication and participation
through indirect, collective organizations, in particular trade unions, is much greater in
Slovenia than in the rest of Europe or in other transitional countries. [Makarovic (2006) pp.
198-202) Makarovic cites Stanojevic for the argument that continued Slovenian reliance on
indirect, trade union channels is a holdover from the self-management period where workers
councils were the dominant indirect (i.e. representative) form of participation. [Makarovic
(2006) p. 207-8)] This lack of direct, individual participation is considered detrimental in
HRM models to internal labour fl exibility and innovation.
17 For a description and methodology of these studies, see Svetlik (2006) p. 17, and Ignjatovic
and Svetlik (2006) p. 29.
616

Stanojevic, however, also highlights another aspect of the industrial relations system
as it developed in the post-independence period. Given the centralization of collective
bargaining, the basic determination of wages, benefi ts and working conditions
was made at the national or the branch level. This meant that local unions at the fi rm
level, except for those unions in large and generally more successful companies which
were able to negotiate fi rm level agreements, were relatively powerless in pressing for
the improvements in wages and working conditions at their individual places of employment,
particularly since in the weaker, labour intensive industries, the employers faced
increasingly demanding and competitive markets. The evidence that Stanojevic marshals
is that this challenge was successfully met in many cases by the intensifi cation of work B
shift work, overtime, weekend work, fi xed term employment B such that these organizations
Ahave shown a surprising survival capability in the highly competitive international
environment. In spite of the said internal and external rigidity combination they were
suffi ciently competitive.@ [Stanojevic (2006) p. 174]
However, here Stanojevic points out a seeming contradiction. Under the new property
relations, managerial and organizational issues at the workplace have come under
the exclusive jurisdiction of management. Hence, intensifi cation of work by management
could only have come with the acquiescence of the local unions which would, in
the normal course be expected to oppose such intensifi cation. Rather, they participated
in it. Stanojevic concludes:
This type of activation of collective representation was based on two key conditions
in the 1990s: the fi rst was the preserved high job security level and the second was
the regularity of payments in accordance with the collective agreement standards.
In organisations where these two conditions were fulfi lled, management enjoyed full
union and employee support.... Not only did [the unions] support the work intensifi
cation regimes but they included their own mechanism in those regimes: the mobilisation
capacity of trade unions was transformed into an entrepreneurial resource.
[Stanojevic (2006) p. 177]
However, for long term job and union survival, this strategy raises two problems. The
fi rst is that incorporation of the local union=s mobilisation capacity into the management
structure can only serve to weaken the oppositional powers and legitimacy of local unions
over the long run, while the practice of work intensifi cation, though effective in the
transition, reached its limits by the end of the 1990s. Thus, he concludes, the union-management
coalition is only temporary and will become unstable. What does that mean for
industrial relations at the workplace? Two alternatives are presented, deregulation of the
external labour market (external fl exibilisation) and a consequent increase in a contingent
labour force, or increased internal fl exibilisation based on technological change and
direct (individual) participation in the labour process. [Stanojevic (2006) p. 179] Either
case will involve a signifi cant change in industrial relations and union preference functions,
though at different levels in the industrial relations system.
617

618
CHAPTER 6
LABOUR AND THE TRANSITION: PART II
SYSTEMIC CHANGE AND THE RESTRUCTURING
OF THE LABOUR MARKET
The previous chapter described in some detail the institutional changes that the Slovenian
labour market underwent in the process of the transition from a socialist self-managed
to a capitalist labour market. The major conclusion of that discussion was that, despite
the magnitude of the systemic change, there was a strong thread of continuity tying
the self-management institutions of the socialist era to the elements of workers= ownership,
co-determination, and corporatism that were integral to the social market capitalist system
that emerged, under union pressure, during the 1990s.
This institutional continuity, however, does not necessarily imply that an analogous
continuity can be concluded to have occurred in the actual operations of the labour
market: in the behaviour of individual workers or employers, in the structure of employment,
unemployment, and wages, in inter-industry, inter-occupation or regional
mobility, or in the composition of the labour force and the participation of the potential
eligible population in the work force. The point is that under the socialist system, certain
economic and social policies prevailed that moulded the labour market to specifi c
patterns that were distinct from those that would normally prevail in a capitalist labour
market. 1
Two specifi c constraints on the operation of the labour market under socialist selfmanagement
come immediately to mind. The fi rst relates to the general Yugoslav policy
of autonomous development. As a result, Yugoslavia maintained a moderately strong
protectionist policy aimed at directing production inward, toward the domestic market.
Combined with a policy of industrial decentralization and integration with agriculture,
this resulted in a geographically dispersed, in many cases highly localized, labour market.
This was especially true of Slovenia where industry was spread out over a countryside
that was itself naturally divided by mountains and valleys. The historic rationale for
this policy lay in the war and cold war conditions. After a successful war effort based
on highly decentralised and clandestine military production, and caught in the post war
between the two major ideological, military blocks, Yugoslavia opted for a decentralized
and autonomous industrialization that avoided, as far as was possible, dependence on,
or vulnerability to, either side. Slovenia, with its historic and cultural ties to western Europe,
however, was much less autonomous and independent in its economic orientation
with respect to its reliance on export markets in western Europe, than most other parts
of the Yugoslav federation.
The second major constraint on the labour market was imbedded in the socialist value
system. There were two particularly important manifestations of this for the labour
1 Identifying these differences, however, says nothing about the relative effi ciency or effi cacy of
the two types of markets, economically or socially. Ultimately, any judgement as to the relative merit
of the two types of labour market rests on political values and evaluations of the relative social and
economic outcomes.

market, the preoccupation with equality of opportunity and of result, and the valuation
of goods production over that of services. The former led to interventions both in and
outside of the labour market that provided both greater equality of opportunity, particularly
for women, and a leveling of incomes across the economy and among enterprises.
It also contributed to a strong commitment to work across the labour force given the
socialist distribution principle of >to each according to his work.= The latter, the preoccupation
with goods production, contributed to the underdevelopment of the service sector
though it is quite possible that this underdevelopment was more apparent than real
due to the incorporation of many business services within the autonomous enterprise
structures and the widespread availability of personal services within the unoffi cial or
>grey= economy.
Furthermore, as we pointed out in the previous chapter, as Slovenia entered the transition
phase, the nature of the self-management system and the political alliances between workers
and the state had ensured a level of job and social security that was at least as high as that pertaining
in the more highly regulated labour markets of western Europe, such as Germany.
THE LABOUR MARKET ENTERING TRANSITION
The state of the Slovenian labour market, its similarities and differences with capitalist
labour markets in western Europe, were surveyed by Svetlik just as the major
changes in the labour market were beginning. [Svetlik (1992)] This provides us with
a fairly complete description of both the similarities and the differences in the Slovenian
market and its adjustment processes from those in the European Community,
characteristics that had resulted from Slovenia=s socialist self-management policies. As
he notes, it provides a guide to the changes required as the Slovenian economy shifts
Afrom a cooperative model characterized by ... [a] combination of state, self-management
and hidden labour market regulation to a regulation labour market combined
with state intervention by means of labour market policy. This means a shift from
absolute job security to the involuntary labour market mobility, from full employment
to minimal unemployment, from sub-employment to maximal economizing of labour
etc.@ [Svetlik (1992) p. 2]
There were certain unique characteristics of the Slovenian labour force and labour market.
There were very high participation (activity) rates, the highest in Europe, particularly
for women, one aspect of Slovenia=s communist heritage with its egalitarian values. The
age distribution was also favourable with a high proportion of the population under 14
years and a low proportion over 65. >Guest workers,= mainly from other republics of the
former Yugoslavia, were just under seven per cent of the population, a ratio comparable
to Germany or France. The population was somewhat younger than the rest of Europe
though formal education lagged well behind neighbouring countries such as Austria and
Italy. [Svetlik (1992) pp. 3-4]
With respect to structural distribution, Slovenia had a high proportion of its labour
force in agriculture, around 15%, placing it in the same peripheral, lesser-developed,
group of countries with Portugal, Greece and Ireland. This concentration of farmers was
also refl ected in the statistics on the relatively high proportion of the labour force listed
as employers or self-employed, more than half of whom were farmers. However, it was
evident that rising unemployment, the rapid increase in the number of small businesses,
619

and the beginning of a major expansion in services was already contributing to a signifi
cant expansion in the number of self-employed and small employers by the early
nineties. On the other hand, 45% of the labour force was employed in manufacturing,
signifi cantly higher even than Germany; while employment in services accounted for
only 40%, signifi cantly lower even than Portugal. Only in transport and communications
was Slovenia comparable to the rest of Europe in services. This heavy concentration of
employment in manufacturing and the paucity in services led Svetlik to predict a fairly
massive forced mobility from industrial employment to services; but since one-third of
those industrial workers were unskilled or semi-skilled, this would require a major effort
in occupational retraining. [Svetlik (1992) p. 4]
As suggested above, the industrial structure of the labour force was infl uenced by the
stress in the communist production model on industry which, combined with the persistence
of traditional agriculture and small, independent land holders, contributed to the
stunting of the service sector. However, this began to change in the 1980s as Athe communist
model entered its fi nal phase ... [and] self-employment in industry and in services
started to grow.@ [Svetlik (1992), p. 5] The transformation of the economic system could,
therefore, be expected to prompt a major structural shift from industry and agriculture to
services with attendant labour market turbulence and adjustment problems. The extent
of such turbulence and problems would depend on the rate of growth of the economy
and of new employment opportunities and on the ability of the labour force to adapt and
to acquire the skills to match the requirements of the new service jobs.
High participation in the labour force was reinforced by long working hours with Slovenia
counting among the top group of European countries measured by average working hours
per week. This was accentuated by relatively little paid time-off and a low percentage of parttime
workers. Relative to other parts of Europe, the low incidence of part-time work was particularly
noticeable for women workers of whom only just over 3 per cent worked part-time.
Further, while unemployment was rising from the very low rates characteristic of the socialist
period, it was still relatively low (7.3 per cent in November 1991) by European and transitional
economies standards, though sharp increases in unemployment were still to come. The brunt
of the unemployment was felt by youth whose unemployment rate exceeded twenty per cent
as young people entered a labour market where job destruction exceeded job creation. Long
term unemployment, however, up to this point remained modest refl ecting, in part, the recentness
of the unemployment phenomenum and the strictness of redundancy regulations.
Thus on the eve of the transition and independence depression, human resources in
Slovenia were Aextensively utilized, meaning that a high percentage of the population
work[ed] full-time and long hours.@ (Svetlik (1992) p. 7) However, despite high formal utilization
of labour, the high degree of job security under the previous system, minimal levels
of labour market mobility, and the low incidence of part-time work meant that there was
a considerable buildup of underemployment and signifi cant labour market rigidity which
were exposed when the labour market was transformed by capitalist institutions and independence.
Svetlik concludes:
620
A...the Slovenian labour market [was] small, less developed and peripheral. However,
it can well be compared with the labour markets of less developed, small and
peripheral EC countries, of which some deviate more from the European pattern than
the Slovenian.@ [Svetlik (1992) p. 12]

DEPRESSION AND LABOUR MARKET TURBULENCE
The opening up of the Slovenian economy to European competition, the loss of
preferential markets in the former Yugoslavian co-republics and in eastern and central
Europe, the world recession in the early nineties, and the withdrawal of state support
for fl oundering enterprises in Slovenia, combined to bring on the sharp depression
that only began to recede in mid-1993. With that downward spiral, the labour market
underwent its period of greatest turbulence and restructuring. With job security and
wages and conditions threatened by growing levels of insolvency, fi rm closures and
economically mandated redundancies, a large number of workers began the process
of both formal and informal job search. This job search was entered either involuntarily,
after becoming unemployed, or voluntarily, by those seeking more promising and
permanent alternatives to what they increasingly considered transitory employment.
As of 1991, Svetlik reported that one-third of the Slovenian labour force was seeking
new jobs due either to loss of their exiting work or to gain more secure or rewarding
work. Less than one-fi fth of the unemployed were seeking a fi rst job, though to what
extent this low fi gure was due to existing government wage subsidy programs for new
permanent or temporary employment, introduced to ease the transition, is not known.
[Svetlik (1992) p. 8] First-time job seekers were particularly vulnerable to the privations
of unemployment because they were not covered by existing Unemployment Benefi t
(UB) or Unemployment Assistance (UA) plans.
However, conditions in the labour market were to get worse before they got better
as unemployment soared 2 despite a large drop in the active labour force as participation
rates fell signifi cantly along with employment rates. (See Table 6.1) At the same
time, there was little expansion, at least initially, in new forms of work such as temporary
or part-time work. On the other hand, the decline in formal jobs was somewhat
conditioned by the expansion of the informal sector and self-employment, an expansion
encouraged by government policy, while the decline in the participation rates
largely refl ected government support for early retirement of displaced workers. The
most utilized program in the early years of the transition was early retirement. In 1990,
for instance, 15,000 older workers took early retirement rather than enter the ranks of
the unemployed. This was in addition to regular retirements that peaked in Slovenia
in the 1987-1992 period. After 1993 the early retirement program was reduced and as
employment stabilized and the economy began to grow again, early retirement became
only a marginal element in labour market adjustment. [Ignjatovic et al. (2000) p. 8]
While reducing the number of unemployed, however, the high number of retirements
2 There is a signifi cant discrepancy between the registered and the labour market survey unemployment
rates. Ignjatovic et al. explain that it arises because registration allows some workers to
obtain certain benefi ts and access to employment programs even though they are employed in the
informal sector. AMoreover, some persons benefi tted from the legislation which allowed them to
register with the NEO without being active on the labour market, and employers benefi ted from the
subsidies they received if they hired registered unemployed persons (tax deductions, subsidised
work places and training). Many workers, who are registered with the NEO work informally and
thus have two sources of income.@ Thus the discrepancy represents the difference Abetween the real
job seekers and those who are registered ... only in order to attain the status of the unemployed and
to be eligible to cash and other benefi ts.@ [Ignjatovic et al. (2000) pp. 2-3] According to their fi gures
for 1998 (p. 3), 55% of the registered unemployed were not unemployed according to the labour
survey methodology. However, on the contrary side, almost a quarter of the surveyed unemployed
had not registered as unemployed, presumably because they were not eligible for benefi ts.
621

did place a strain on another major social welfare program, the pension system, by not
only increasing the number of pension recipients but also by reducing the number of
those contributing to the pension funds.
Without the decline in participation, however, the unemployment situation would
have been much worse. As it was, between 1988, which we can consider the beginning
of the transition, and 1993 when the depression bottomed out, the labour force declined
by 5 per cent while employment declined almost twice as much, by 9.1 per cent. The rise
in unemployment, however, was much more dramatic. The registered unemployed rose
by over four hundred per cent, while the survey unemployed more than doubled. This
constituted a particular problem for the employment service which, given the previous
low levels of unemployment, was understaffed to meet the wave of redundancies and the
swelling ranks of unemployed.
Table 6.1
Labour Market Indicators: 1988-1995
Year Labour Force Employment Unemployment Rate Participation
(000s) Rate Registered LFS* Rate
1988 980 60.0** 2.2 2.6** 62.7***
1990 954 57.3 4.7 4.9 61.1***
1991 946 56.1 8.2 7.3 60.6
1992 938 54.4 11.5 8.3 59.2
1993 931 52.6 14.4 9.1 57.8
1994 934 52.7 14.5 9.1 57.4
1995 951 54.4 13.9 7.4 58.7
* Labour Force Survey (ILO method)
** 1989
*** Authors' estimate
Source: Ignjatovic et al. (2000) Table 1, p. 3; Vodopivec (2004) Table 18.1, pp. 298-99; Bank of Slovenia, Monthly Bulletin,
Table 3.5, p. 50, October 1993, SORS-Data Portal, Population by Age and Sex.
In addition, the composition of the unemployed changed. Before the transition began,
unemployment was basically a problem of absorbing new entrants to the labour market
given the strong job security protecting employed workers. With the weakening of that
protection and the wave of bankruptcies, redundancies and layoffs that followed, the
newly unemployed were more likely to be older, displaced workers.
Thus, the rising unemployment revealed another dimension of the turbulence in
the labour market. This was the mismatch between the skills of the newly unemployed,
in particular those of the older workers made redundant by the decline and downsizing
in traditional industry, and the skills required to adapt to the structural change in
labour demand, in particular the growth in service employment. Thus, by 1998, Ignjatovic
et al. reported that lower educated workers (fi rst and second levels of education)
accounted for almost of third of all the unemployed but only a fi fth of the employed.
At the same time, the top two levels of educated workers comprised less than seven
per cent of the unemployed but almost 17 per cent of the employed. Furthermore,
long-term unemployment increased because, they argued, older, less skilled workers
were more infl exible, less mobile and harder to retrain than younger, more educated
workers. AOpportunities are signifi cantly better for those who have attained secondary
school or university education, as the proportion of vacancies available to these groups
remains high throughout these years. Discrepancies between supply and demand are
territorially based, as unemployed people are not prepared to move out of the towns.@
622

[Ignjatovic et al. (2000) pp. 3-4] Still, it must be noted that after 2000 the share of the
unemployed without vocational qualifi cations and of long term unemployment both
began to decline signifi cantly. This was offset by a relative increase in unemployment
among fi rst time job seekers and women.
However, we should avoid the temptation to draw the simple conclusion, as did the
Slovenian Employment Service (ESS), Athat the problem of relatively high unemployment
rates in Slovenia is rather on the supply side of the labour market (the skill mix) than on
the demand side@ [ESS, quoted by Ignjatovic et al. (2000) p. 5], particularly in the earlier
years of the nineties. The fact that almost seven per cent of the unemployed were in the
top educated or skilled levels still in 1998 and that youth unemployment remained a
problem throughout the decade B the number of youth among the registered unemployed
was around eleven thousand in 1988 and around thirty thousand in 1999 B attests to
the opposite conclusion, that there remained a problem of a relative >jobless recovery=.
Indeed, as table 6.2 shows, the percentage of the unemployed who were least skilled or
educated (without qualifi cations or unqualifi ed) actually fell quite signifi cantly as unemployment
rose. Net employment growth only began in 1995, recovering to its 1991 level
fi rst in 1998, only to fall again in the following two years before again expanding. In any
event, total employment in Slovenia in 2004, when the country entered the EU, was still
below the level of employment in 1988, before the transformation of the labour market
and the economic system began.
This is not to suggest that education and training programs are not required to
achieve full employment, but rather that they are only effective in promoting employment,
without labour- bottleneck induced infl ation, in an economic climate of adequate
effective demand. The education and age structure of the unemployed is only an indicator
of supply side constraints if the economy is pushing at its capacity limits; that
is, if it is at full-employment of its least plentiful resource, in this case its most skilled
and educated workers. Rather, given the defi cient aggregate demand, the structure of
unemployment that resulted from the transitional depression and the conversion of
under-employment to unemployment is easily explained by the queuing of the unemployed
in a less-than-full-employment capitalist economy. Simply, employers choose
to hire from the queue of jobless the most desirable workers which, for most good
jobs, are those workers that are the best educated, particularly if they have proven
work skills and are mobile. These workers are the most easily and cheaply trained and
educated by the employer for particular jobs and are thus the fi rst hired. Employers
will only hire down the queue B the less educated, older or in some cases, very young
workers B if and when all those ahead of them in the queue, the more educated and
skilled, are employed. 3 This is generally true of all capitalist labour markets at less than
full-employment. Slovenia, having abandoned its full-employment commitment with
the end of socialist self-management, is no exception.
Furthermore, the rapid and sustained rise in labour productivity, which averaged almost
four per cent per year between 1993 and Slovenia=s accession to the EU, not only
curbed the rise in demand for additional workers, it was also indicative that a shortage of
educated and skilled workers was not a structural impediment to growth.
3 For a full elaboration of the job queue model, see Lester Thurow, AA Job Competition Model@,
in Michael Piore (ed.), Unemployment and Infl ation (White Plains, NY: M. E. Sharpe, 1979).
623

Table 6.2
Composition of Registered Unemployed (percentage)
Year Under New Entrants Over 40 years Unqualifi ed Long-term
26 years unemployed
1988 51.9 28.7 14.5 57.1 36.9
1990 51.4 26.5 16.1 49.8 37.4
1991 47.8 22.2 19.0 46.1 41.8
1993 37.4 19.0 28.2 45.3 54.8
1995 32.2 19.7 34.0 46.6 59.0
1997 29.1 18.3 40.8 47.1 59.6
1999 25.8 18.7 48.5 47.5 62.9
2000 23.4 17.9 51.7 47.2 62.9
2001 24.1 18.8 50.5 47.0 58.9
2002 24.0 19.6 49.4 47.0 54.4
2003 26.1 23.2 44.1 44.2 48.6
2004 26.2 25.2 42.8 41.6 46.2
Source: Ignjatovic et al. (2000) Table 2, p.6; National Employment Service, (www.ess.gov.si)
Despite the rise in unemployment and shortage of new jobs, wage growth in the fi rst
half of the nineties was even faster than that of labour productivity, thereby increasing
unit labour costs. This wage growth, Stanojevic argues, occurred in spite of government
incomes policy Aunder the pressure of competing trade unions, with the government afraid
of social unrest and with a background of unresolved ownership relations which caused
weakness on the employers= side.@ [Stanojevic (2000a) p. 29] And yet, in spite of these wage
gains, the pace of infl ation was such that real wages declined after 1989. (See table 6.3)
Though the actual values are not comparable in the two series due to different sources and
different measures, the trends are more or less comparable indicating a drastic fall in real
incomes until the transition depression bottomed out in 1993. After that real wages rose
steadily though reaching their 1990 level only in 1998. [Vodopivec (2004) p. 298]
Table 6.3
Real Wages 1988-1993
Year Index of Net Real Wages 1 Index of Gross Real Wages 2
(1990 = 100) (1990 = 100)
1988 116.8 ...
1989 135.0 ...
1990 100.0 100.0
1991 89.1 77.0
1992 81.1 76.0
1993 94.4 84.5
Source: 1 Bank of Slovenia, Monthly Bulletin, October 1993, September 1998. Social Sector only to 1991.
2 Vodopivec (2004) p. 298.
624
STRUCTURAL CHANGE
The pace of structural change in the labour market was fastest in the period of the
transitional depression, before slowing down during the recovery period. Indeed, it
was virtually complete by the end of the decade. [Vodopevic (2004) p. 311] Evidence
on the industrial structure of the labour force (table 6.4) supports the argument that
the major period of restructuring occurred during the 1990 to 1994 period as a product
of the collapse of non-viable fi rms, the shift in markets, the downsizing of both fi rms

and industries, and the resulting redundancies and exits from the labour force. In the
beginning of the recovery, the strongest employment growth was in public sector, in
particular public administration.
Table 6.4
Paid Employment by Industry: 1985-1995
I: Distribution of Total Paid Workers
Industry/Sector
1985 1990 1991 1992 1993 1994 1995
(% of paid workers)
Primary Industries 4.6 4.6 4.4 4.3 4.2 3.9 3.7
Manufacturing 42.3 42.8 42.2 40.8 38.8 38.5 37.8
Utilities 1.2 1.2 1.3 1.4 1.4 1.4 1.4
Construction 7.9 6.5 6.0 5.2 4.8 5.0 5.0
Goods Production
Transportation &
56.0 55.1 53.9 51.6 49.0 48.8 47.8
Communications 5.9 5.9 6.0 5.9 5.8 5.2 5.0
Trade
Hotels, Restaurants,
9.1 9.3 9.5 9.6 9.6 9.4 9.4
& Tourism
Crafts, Personal
3.2 3.2 3.0 2.8 2.7 2.7 2.6
Services 3.6 2.9 2.6 2.6 2.6 2.5 2.5
Community Services
Business & Financial
1.8 1.6 1.6 1.6 1.6 1.7 1.8
Services 4.5 4.7 5.1 6.0 6.2 5.9 6.1
Education & Culture
Health and
6.0 6.6 7.0 7.4 8.0 8.4 8.6
Social Work 6.4 7.1 7.7 8.1 8.4 8.9 9.2
Public Administration 3.4 3.4 3.5 4.2 5.8 6.3 6.8
All Services 43.9 44.7 46.0 48.2 50.8 51.1 52.0
Total 100 100 100 100 100 100 100
II: Index of Employment by Industry (1985 = 100)
Industry/Sector
1985 1990 1991 1992 1993 1994 1995
Primary Industries 100.0 97.5 83.5 74.6 68.3 63.0 56.6
Manufacturing 100.0 97.7 87.3 78.1 70.9 67.6 65.1
Utilities 100.0 95.7 97.1 93.1 90.7 87.4 87.6
Construction 100.0 79.1 66.5 53.4 46.6 47.0 46.1
Goods Production
Transportation &
100.0 95.0 84.2 74.6 67.6 64.8 62.2
Communications 100.0 96.8 89.9 81.2 75.6 65.7 62.3
Trade
Hotels, Restaurants,
100.0 97.8 90.8 84.7 80.7 76.2 75.0
& Tourism
Crafts, Personal
100.0 97.1 81.7 72.5 66.4 63.8 59.0
Services 100.0 78.7 63.2 58.3 57.5 52.9 50.8
Community Services
Business & Financial
100.0 89.6 80.6 74.1 71.8 72.8 75.6
Services 100.0 100.8 99.5 108.2 107.0 97.7 99.6
Education & Culture
Health and
100.0 106.6 102.5 100.5 103.1 104.8 105.3
Social Work 100.0 106.9 104.6 101.8 101.4 102.8 104.3
Public Administration 100.0 95.8 89.5 98.9 131.0 136.1 143.6
All Services 100.0 98.4 91.8 88.9 89.5 86.5 86.5
Total Paid Workers 100.0 96.5 87.6 80.9 77.2 74.3 72.9
Source: Calculated from Statistical Yearbook of Slovenia, 1996, Table 12.3.
625

The nature of the structural change in the labour market is readily apparent in the
fi gures. First, the mechanism of structural change was rapid dis-employment in most
of the goods producing sector, most importantly in manufacturing where the number
of workers fell by a third in the fi rst half of the nineties. This decline was particularly
signifi cant largely because of the very high percentage of Slovenian workers engaged
in manufacturing, a percentage that was high even by comparison with the other most
industrialized countries of western Europe. That meant that, of the drop in the actual
number of employed in Slovenia between 1990 and 1994, almost three fi fths (57.4%) were
shed by the manufacturing sector alone. Most badly affected were the more traditional
groups of manufacturing workers, those with the lowest education, machine operators
and unskilled workers, and those with two or three years of vocational training. Highschool
educated workers were also under pressure from unemployment up until the recovery
began to take hold in 1995 while the most educated employees seemed to have
been little affected. [Stanojevic (2000a) p. 27] However, by 1994, unemployment peaked
at around 9 per cent as measured by the labour force survey and for the rest of the decade
fl uctuated in the low- to mid-seven per cent range. Thus, the rate of structural change
slowed markedly as the propelling force of unemployment waned.
Second, as with manufacturing, there was a similar, if not quite so severe, movement
of labour out of market-based services industries, such as transportation, hotels, restaurants
and tourism, crafts and personal services and, to a lesser extent, trade. The only
sectors that remained relatively untouched in the transitional depression were business
and fi nancial services, and the public sector which actually grew by six per cent between
1990 and 1994. This was entirely accounted for by the surprisingly rapid increase in public
administration employment after 1992. However, the relatively stable employment in
health and education contributed to the increased proportion of the total labour force
employed in the public sector, from 17.1 per cent in 1990 to 23.6 per cent in 1994, during
this period of crisis and intensive structural change.
There are reasons, however, that we should be somewhat cautious about interpreting
these labour market statistics too rigorously. It is not clear, for instance, how many workers
displaced in the formal manufacturing sector went into self-employment or into the
informal sector, or how many employed in business, fi nance or other services in manufacturing
fi rms were reclassifi ed as service workers when these fi rms downsized and
shed their ancillary and support services. Nevertheless, the direction of change is clear
and accords with what one would expect in a transformation from a socialist to capitalist
market economy and from a import replacement to an export orientation..
626
RECOVERY, GROWTH AND LABOUR MARKET ADJUSTMENT
The recovery that became evident after 1993 stabilized unemployment in the seven
plus per cent range for the remainder of the decade. A further reduction to the midsix
per cent range occurred in the three years preceding accession to the European Union.
This was accompanied by a greatly reduced pace of structural change in the labour
market. However, while the pace of change slackened, it did not completely stop. Led
by manufacturing, employment in goods production continued to shrink relative to the
steadily expanding service and trade sectors and in 1999, for the fi rst time, goods production
accounted for less than half of the employed labour force, while services comprised

more than half, a situation that has persisted since. (See table 6.5) Nevertheless, just as
Vodopivec concluded, the fi gures indicate that the process of structural change had more
or less petered out in the last few years before Slovenia=s entry into the EU.
What remained of the trend out of goods production can largely be explained by the
higher income elasticity for services, particularly social services, as income rises and
the differential in labour productivity growth which typically favours goods production.
However, there remains strong pressure favouring a continuation of the downward trend
in industrial employment and the expansion of service and trade employment. This pressure
emanates from the EU=s neo-liberal policy agenda calling for increased labour market
fl exibility, a policy agenda that has been adopted by Slovenia.
Table 6.5
Employment by Sector and Selected Industries, 1995-2004 (Second Quarter)*
I. Distribution of Employment by Sector and Selected Industries
(%)
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Agriculture 10.4 10.1 12.0 12.0 10.8 9.5 9.8 9.7 8.4 9.6
Manufacturing 35.6 34.3 32.3 32.0 31.2 30.1 30.3 31.1 29.5 na
Construction 5.1 5.4 6.1 5.6 5.0 5.4 6.0 5.9 5.8 na
Goods Production 53.5 52.3 52.7 51.5 48.5 46.9 47.9 48.3 45.3 45.6
Trade 11.9 11.7 11.9 12.2 12.2 13.3 12.4 13.0 13.2 na
Hotel and
Restaurants 3.5 3.9 4.2 4.2 3.8 3.8 3.7 3.9 4.0 na
Trans and Comm 5.9 5.8 5.7 5.6 6.1 6.7 6.2 6.0 6.6 na
F.I.R.E** 6.1 6.5 6.8 7.2 7.9 7.3 7.5 7.3 8.4 na
Public Admin 4.4 4.7 4.0 4.5 5.5 5.9 5.3 5.4 5.6 na
Education and Health 11.3 11.3 10.6 11.1 11.7 11.5 11.9 12.1 12.1 na
All Services 46.1 47.5 47.2 48.1 51.2 52.3 50.7 51.3 54.0 53.0
II. Indexes of Employment by Sector and Selected Industries (Second Quarter)
(1995 (Second Quarter) = 100)
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Agriculture 100.0 96.7 117.4 118.5 104.3 92.4 98.8 96.7 81.5 98.9
Manufacturing 100.0 95.9 92.4 92.4 88.5 85.7 88.2 91.4 84.1 na
Construction 100.0 104.4 122.2 113.3 100.0 106.7 122.2 120.0 115.6 na
Goods Production 100.0 97.2 100.2 98.9 91.7 88.8 92.8 94.3 86.0 91.3
Trade 100.0 98.1 101.9 105.7 103.8 113.3 107.6 114.3 112.4 na
Hotel and
Restaurants 100.0 109.7 122.6 122.6 109.7 103.8 115.4 109.6 105.8 na
Trans and Comm 100.0 98.1 98.1 98.1 103.8 115.4 109.6 105.8 113.5 na
F.I.R.E** 100.0 105.6 113.0 120.4 129.6 120.4 127.8 124.1 138.9 na
Public Admin 100.0 105.1 92.3 105.1 125.6 135.9 123.1 128.2 128.2 na
Education and Health 100.0 99.0 95.0 101.0 105.0 103.0 109.0 112.0 109.0 na
All Services 100.0 102.5 104.2 107.1 112.3 115.0 113.8 116.2 118.9 123.8
Total 100.0 99.5 101.8 102.8 101.1 101.4 103.6 104.5 101.6 107.3
na = not available
*These fi gures are not comparable with those in table xx.4 as they are based on different defi nitions and are for second
quarter employment only. However, the trends in employment structure that they reveal are considered comparable.
**Finance, Insurance and Real Estate
Source: Calculated from Statistical Yearbook of Slovenia, 2004, Table 12.3; Monthly Statistical Review of Slovenia, vol. 15,
no. 4, April 2005, p. 23.
627

Critics of the gradualist transition path have argued that this approach has resulted in
incomplete structural adjustment, a Alow intensity of structural changes in the economy
as a whole, owning to a gradualist economic policy.@ [Rojec et al. (2004) p. 470] They
point, in particular, to the low level of restructuring within manufacturing industries
(intra-industry restructuring) and in the failure to shift employment from labour-intensive,
low technology manufacturing to medium and high technology industries. At the
same time, they argue that restructuring has been even slower and more incomplete in
the non-tradeable sectors (services) with resulting low productivity growth. [Rojec et al.
(2004) p. 473-4] One of the major underlying causes of the low intensity of restructuring
and persisting infl ation was, they claim, existing labour market rigidities, part of the
institutional structure inherited from the previous system with the gradualist approach.
Included in the >rigidities= are the unions and state-wide collective bargaining, in short,
the whole industrial relations system as it evolved. Indeed, Slovenian economists seem to
have joined the neo-liberal labour market Afl exibility@ bandwagon.
However, what evidence is there that the Slovenian labour market is as infl exible as
its critics allege or that such rigidities signifi cantly contributed to infl ation or continuing
unemployment? One argument is that the regulation of the employment relation
by social and collective agreements, the rigid structuring of wage levels within the
agreements, legislated provisions for job security and generous social programs were
a major barrier to labour market adjustment, wage fl exibility, and productivity growth
and, thus, contributed to infl ation and unemployment. Unfortunately for these critics,
evidence from other countries with similar centralized systems and labour-sanctioned
incomes policies and with similar social protection programs points to the opposite
conclusion, in particular to better unemployment-infl ation outcomes. [Phillips (1995)
pp. 525-539] Indeed, as Palley concludes from his study of unemployment rates within
the OECD, the numbers Aprovide no evidence that lowering employment protection,
replacement rates or benefi t durations will reduce unemployment. Nor will lowering
union density.... Finally, ... coordination of wage bargaining and union wage coverage
can actually lower unemployment.@ [Palley (2001) p. 3] In short, his evidence is that the
unemployment and generally poor economic performance of many European countries
is the result of Aself-infl icted, dysfunctional macroeconomic policy@ [Palley (2001) p. 1]
which is a consequence of adopting the macroeconomic goals and tools of the Maastricht
agreement.
Other critics of Slovenian labour market policies and institutions point to the slow
growth of Afl exible forms of employment@ in the post-independence period. This >fl exibility=
is associated in North America with labour market segmentation (the so-called Adual
labour market@) and the growth of a contingent, lesser rewarded and more insecure, labour
force. Ignjatovic, et al. have reported fi gures for four types of >fl exible= employment
in the 1991-1999 period; self-employment, contract and cash-in-hand work, temporary
employment and part-time employment. These are reported in table 6.6 for 1991, the year
of independence, 1994, the fi rst full year of sustained recovery, and 1999, the end of the
decade. What these fi gures show is that the only signifi cant increase in contingent labour
is in temporary employment. Self-employment actually fell slightly from the expanded
levels of the late 1980s and early >90s giving support to those who argue that workers
prefer employment and will return from >involuntary self-employment= as jobs become
available.
628

Table 6.6
Flexible Employment as percentage of total Employment
Slovenia: Selected Years, 1991-1999
Year Self-employment Contract and Temporary Part-time
cash-in-hand work employment employment
1991 14.1 1.9* 4.8 5.8
1994 12.2 2.9 7.1 5.5
1999 11.7 2.4 10.9 6.6
* 1992
Source: Adapted from Ignjatovic, et al. (2000) Table 3, p. 8)
Much has been made of the slow, almost negligible, growth in part-time employment
as a major contributor to labour market rigidity. Part-time work is much less prevalent in
Slovenia than elsewhere in the EU. Sicherl=s fi gures for 2000 give a rate of just 6.5 per cent
compared to the EU15 average of 17.7. Moreover, there is very little difference between
male and female rates of participation: 5.3 per cent for men and 7.8 per cent for women.
This compares to EU15 rates of 6.3 per cent for men and 33.7 per cent for women. [Sicherl
(2005) p. 145] In short, it is the resistance of women to being relegated to the contingent
labour force, as well as a lack of demand by employers for part time workers, that has
restricted the growth of a part-time work force. In fact, part-time work has primarily
been utilized as a transition to retirement or to give employment to disabled workers.
[Ignjatovic, et al. (2000) p. 8]
The ability and willingness of women to resist being relegated to the contingent labour
force have been attributed to strict labour market regulations regarding part-time
work and retirement rights that discourage employers and workers from creating or seeking
part-time jobs, combined with Afavourable child care arrangements and social legislation
[that have] enabled Slovenia to maintain the equal opportunity situation with regard
to gender employment that prevailed in the earlier system.@ [Sicherl (2005) p. 145-46] In
other words, though the lack of growth of part-time work may be considered a contributor
to labour market rigidity by employers and economists, it is a major contributor to the
equality of women in the labour market that has been a hallmark of Slovenia=s transition,
unlike the labour market outcomes in other market economies.
On the other hand, as the table suggests, temporary jobs have expanded signifi cantly,
to a level comparable to the EU15. In 2000, the percentage of temporary jobs was 11.5 in
Slovenia and 11.4 per cent in the EU15. This is almost double the rate in the UK which is
usually considered the more >fl exible= labour market. [Sicherl (2005) p. 144] Indeed, temporary
work has been the primary instrument for avoiding the restrictions and cost of redundancy
and was thus favoured by employers. Short term contracts, usually of 6 to 7 months,
accounted for over 70 percent of new jobs after 1997.
However, temporary contracts are not without their drawbacks. They compromise
workers= social security for the benefi t of employers. At the same time, they account for
30 per cent of fl ows into the ranks of the unemployed, a higher proportion than those
who lost the jobs due to redundancy or who had just entered the labour market for the
fi rst time. [Sicherl (2005) p. 143] Temporary work has not only been a major contributor
to fl ows into unemployment, but also, by 1999, the second most important reason for
exit from the labour market. [Ignjatovic et al. (2000) p. 9] Furthermore, temporary work
also served to segment the labour market into a dual structure which disadvantaged
young workers, thereby creating a generational divide. There is also evidence that those
629

disadvantaged by temporary work included those with lower qualifi cations, women, and
workers in seasonal industries. [Sicherl (2005) p. 144]
Nevertheless, Slovenian government policy has been fairly liberal toward fi xed-term
employment. Though restricted to Aobjective@ cases defi ned by law, in practice there has
not been a limit on the number of successive fi xed-term contracts nor on the maximum
period of successive contracts. [Haltiwanger and Vodopivec (2002) pp. 8-9] One particular
institution, that by providing less onerous regulation and more favourable tax provisions
for employers, has encouraged the growth of temporary jobs is Student Services,
employment agencies for secondary school and university students. These agencies, operating
since 1998, have prompted young people to take >temporary= jobs while retaining
student status, often tenuously, through part-time registration with educational institutions.
However, this has only contributed to the segmenting of the labour market on a
generational basis.
Though the percentage of workers employed in temporary work in Slovenia is very
close to the EU15 average, it surpasses the average in the expanded EU25. Temporary
work is utilized by most Slovenian companies, though according to Stanojevic=s investigations,
for less than 5 per cent of their employees. Still, it is considered an important
source of fl exibility for 40 per cent of companies and >very important= for10 per cent.
A disproportionate number of those in temporary positions are women, particularly in
retail and public services. [Stanojevic (2005) p. 6]
The channelling of women and youth into a temporary employment labour force, while
providing employers with fl exibility, has a negative side. Where there are weakly-organized,
or no unions the Atemporary employed young workers are put in the role of the bad working
condition spreader ... which foster the transition of the fully employed into other, more
fl exible forms of employment.... The result is a deterioration of working and employment
conditions for all categories of workers.@ Further, it contributes to a generational divide in
social ideology where Amass youth individualism ... spontaneously corrodes the world of
co-ordinated market economy and welfare state of the middle-aged and older generations.@
[Stanojevic (2005) p. 11] The prolonged retention of the younger workers in temporary low
quality employment has the additional affect of lowering fertility rates which fell signifi -
cantly after the transition and by 1997 the rate of natural increase had become negative.
[Stanojevic (2005) p. 11-12]
Critics of Slovenia=s regulated labour market have also ignored the substantial fl exibility
provided at the workplace in the form of fl exible work hours, long work hours,
overtime, shift work and weekend work that has been employed by fi rms with the active
co-operation and support of the unions. The Cranet survey in 2001 revealed widespread
intensifi cation of work in the form of longer working time which now exceeds the EU25
average. The biggest increase occurred among export-oriented, manufacturing fi rms with
a poorly educated labour force. [Stanojevic (2005) p. 5] In unionized companies selective
fl exibility in the form of longer hours is Acollectivized@ in union demands for higher
pay and job security and is supplemented by the use of temporary workers for the less
attractive, poor and entry-level jobs. In weakly unionized fi rms, more use is made of
overtime and weekend work. In non-unionized companies, by contrast, greater use is
made of temporary workers who are integrated with fully employed workers throughout
the operations rather than being assigned primarily to the less attractive jobs. In any case
the combination of longer and more fl exible hours and widespread use of temporary
630

employment contracts has made the labour market far more fl exible than would appear
at fi rst glance.
Despite the growth of temporary work, however, 70 per cent of the workforce are permanent
workers with open-ended contracts which provides a strong element of employment
security in exchange for work intensifi cation. [Stanojevic (2001a) p. 2].There is a dark
side, of course, to this intensifi cation. The intensity and extensive hours of work of the
regularly employed and the decline in the quality of work, however, Atrap@ those with openended
contracts in a working environment that instead of producing a higher quality of
life, Aliterally destroys it@ with mounting problems of alcohol consumption, continuing high
industrial disease rates and cancer, and increased respiratory system disease. [Stanojevic
(2005) pp.12-13]
Stanojevic supplemented the results of the Cranet survey with his own investigation of
labour adjustment in fi ve selected fi rms. What he found was a variety of fl exibility practices,
from contract and student workers, overtime and weekend work, and >functional= fl exibility
(internal mobility) to putting-out systems to accommodate seasonal demands. Three particularly
Slovenian labour market characteristics stood out as having important effects on the
fi rms adjustment to the new economic environment. One was the loyalty to companies and
the compression of wage structures, a legacy of socialist self-management. Second, was the
willingness and ability of the unions to work with management to overcome inherent rigidities
in their particular situations, and, thirdly, the lack of >place mobility=, a legacy of the
decentralized location in small towns of much of Slovenian industry, compounded by the
lack of availability and cost of housing in urban areas where employment opportunities were
growing. [Stanojevic (2005) pp. 21-31]
Furthermore, the apparent rigidity in wages and wage structures determined by a
strict classifi cation of workers based on education, has been found by other researchers
to be much overestimated. What was new and is key to the new wage system is fi rm- and
worker-specifi c deviations from contract minimums and wage guidelines related to the
success of the fi rm and/or of the worker. The Slovenian system is highly formalized and
structured but is evolving.
Basic wage, minimum wages, and indexation clauses all provide constraints on
the wage determination process. However, allowance for idiosyncratic deviations on
a fi rm-specifi c and even worker-specifi c basis offer the opportunity for the system (for
at least some fi rms) to be responsive to market forces. [Haltiwanger and Vodopivec
(2002) p. 12]
One conclusion that comes from these surveys and studies is that the infl exibility
attributed to the Slovenian labour market in the transition appears to be more apparent
than real. The fact is that work is central to the social ethos and, motivated by a growing
materialism, workers have been prepared to intensify their work effort and to be fl exible
in their working hours to ensure job security and a better income. The charge that the
Slovenian labour market is over-regulated and infl exible, as the critics of the Slovenian
>gradualist= transition process claim, Stojanovic claims, is Atotally inconsistent@ with Slovenian
results.
Slovenian >rigidity= is part of the system that generated the successful transition and
was, in fact, not infl exible and Athe >rigid= institutional environment, mediated international
pressures to the companies@ with quite specifi c fl exibilization: Aselective fl exibility of
the fully-employed, well unionised, workforce on the one hand, and massive temporary
631

employment of the young population on the other, and combined them.@ Trade unions
had a signifi cant role in negotiating fl exibility. AWhen labour market enables massive use
of temporary work, companies include it in the production process, and when it is not
possible (which is the case in relatively closed, isolated small town areas), they substitute
it with more intensive internal functional fl exibilisation.@ Unions did not oppose this but
mediated and adapted through forms of agreed work intensifi cation to Aimprove their
relatively low wages@.[Stojanovic (2005) pp. 31- 32]
The issue of fl exibility in the Slovenian labour market in the transitional period is
also addressed in the study by Haltiwanger and Vodopivec of worker and job fl ows and
fi rm wage policies. [Haltiwanger and Vodopivec (2002)] What they looked at were job
fl ows (the destruction and creation of jobs within and between fi rms and industries);
worker fl ows (accession and separation of workers from fi rms and industries); and the
relationships between these fl ows and wage policies within industries and fi rms. That is,
they were looking at the >fl exibility= of the labour market with regard to job creation and
destruction and worker mobility and, in this connection, the role of inter- and intra- fi rm
wage differentials in promoting job and worker mobility.
Their data covering the period 1997-99 offers little support for the contention that the
strong regulation of the labour market inhibited labour adjustment. During that period,
nearing the end of the transition decade, job creation and destruction rates (job turnover
rates) of 10 per cent and worker turnover rates of 15 per cent were Acomparable to
rates observed in Western economy countries.@ [Haltiwanger and Vodopivec (2002) p.
19] However, job reallocation rates, primarily between fi rms rather than within fi rms,
accounted for a higher proportion of worker mobility than in other comparable western
economies, which is consistent with the fact that the Slovenian labour market was still in
the process of structural change in the direction of a more service intensive economy, and
yet the labour market was suffi ciently fl exible to accommodate this adjustment.
Further, despite the highly regulated wage levels and structures, the provisions for industry-level
collective agreements and for individual fi rms to pay wage premiums based
on the Asuccess@ of an individual worker or a fi rm provided the scope for suffi cient wage
differentials between and within fi rms and industries to promote worker mobility in
>market effi cient= ways (e.g. AFirms with high residual wage dispersion are able to induce
separations for its low wage workers and retain its higher wage workers@); or to reduce
turnover (AFirms with higher average wages ... have lower job turnover, worker turnover
and excess worker turn over....@) [Haltiwanger and Vodopivec (2002) p. 30]
Perhaps the most comprehensive examination of the fl exibility issue in the Slovenian
transition is provided in the collection of studies edited by Ivan Svetlik and Branko Ilic
based on analysis of the CRANET survey of 2001 which involved the study of human
resource management in 22 European countries, including Slovenia. [Svetlik (2006) p.17]
Basically, all the individual studies, which covered the whole gamut of human resource
management policies and practices, supported Stanojevic=s analysis and conclusions.
The transitional economic development strategy was Abased on increasing the intensity
of work and unfriendly forms of employment fl exibility.@ [Svetlik and Ilic (2006) p. 7] >Unfriendly
forms= in this regard referred to weekend work, shift work, overtime, temporary
(fi xed term) and casual work. This was in the context of a rigid labour market regulation,
high wages and low numerical fl exibility institutionalized, under worker pressure, in the
labour, job security, privatization, and industrial relations legislation that was introduced
632

in the 1988 to 1994 period to dampen rising labour militancy and the strike wave. [Stanojevic
(2006) pp. 159-161]
But as Svetlik notes, Slovenia can not continue to rely on work intensifi cation under
traditional Aautocratic and non-participative methods of management@ to remain competitive
with the evolving European knowledge-based economy. [Svetlik (2006) p. 22;
Stanojevic (2006) pp. 171 ff.] Thus, the call for more internal fl exibility related to such
practices as functional fl exibility, career paths, education and retraining and individual-
and family-friendly forms of employment fl exibility such as fl ex-time, job-sharing, homebased
work, tele-work, and, in particular, an increase in part-time work that would allow
women to better combine paid work with care-work. [Mrcela and Ignjatovic (2006) pp.
345-6] Part-time work is, of course, problematic if it leads, as in North America, to income
insecurity, low wages and lack of access to benefi ts. It is only >family-friendly= if it
is backed up by strong social welfare programs that guarantee income security and benefi
ts, a fact the authors recognize in their concept of Afl exicurity.@ [Mrcela and Ignjatovic
(2006) pp. 328-31]
On the basis of all the cumulative evidence, therefore, we must reject the argument
that Slovenia=s gradualist transition, its modest adaptation of labour market institutions
from the previous system, and its adoption of a strong measure of institutional and
legislative regulation, have created infl exibility in the labour market detrimental to its
economic growth by the time of EU entry in 2004. Strong labour productivity growth
throughout the transition period is evidence that internal fl exibility, even if it was primarily
of the >unfriendly= type, compensated for institutional rigidity in the labour market.
Even in the aftermath of the CRANET survey, from 2001 to 2005, labour productivity
grew at an average annual rate of over three per cent (3.14%) which is high by any standard
of comparison. [Mirror (March 2006) p. A 13]
This is not to say that there were no impediments to labour market adjustment and
worker mobility inherent in the Slovenian labour market in the period. One was the age
structure of the Slovenian population and labour force, the second, barriers to spatial/regional
mobility. However, these were embodied in Slovenian culture and history, not in
labour market regulation.
The aging of the population will, almost certainly, increasingly hinder labour mobility
and slow the pace of labour adjustment. For the past three decades, a falling birth rate,
now among the lowest in the EU, has meant a gradual decrease in the population. Sicherl
credits the low birth rate to the diffi culty young families have in fi nding accommodation
and the barriers young mothers, or potential mothers, face in fi nding good jobs in the
labour market. [Sicherl (2005) p. 141] Whatever the case, the result was that the potential
labour force, the population aged 15-64, stopped growing from 1992-1995 and, though
it resumed slow growth after the mid >90s, is expected to again cease growth in 2004.
The consequence, of course, is low rates of new entry into the labour market, entry that
would otherwise provide the most favourable candidates for occupational, industrial and
spatial mobility.
Despite the slow and potentially negative growth in the working age population, the
proportion of the aged in the overall population was initially relatively low due to the low
birth rate and high death rate in the wartime period, 1939-47. This age structure, of course,
facilitated labour market adjustment in the early years of the transition with early retirement
of the war and immediate post-war generation of workers and the hiring of a smaller
cohort of new, young entrants into the labour market on fi xed-term contracts. However,
633

the longer life expectancy and declining birth rates now is raising the proportion of the
elderly in the population which puts increasing strain on the pension plan and on health
and social services.
The aging of the labour force that results from the low birth rate, and the tendency of
younger workers to enter the labour market at a later age as a result of prolongation of
their education required to upgrade the quality and qualifi cations of new entrants into
the labour market, directly restricts the pace of labour mobility and market adjustment.
The reason is that older workers are much less mobile both spatially and occupationally
than younger workers since the rate of return to such mobility, both to employers and to
workers, declines with age. Even if the costs of uprooting, moving, training and retraining
an older worker were not higher, as indeed the evidence would suggest, the older
the worker is, the fewer the years of productive labour the worker and the employer can
expect to have to cover the cost and make a return to the investment.
In any case, spatial mobility is already restricted in Slovenia by the shortage of accessible
rental housing in major centres and the high level of home ownership as a result of
the privatization of socially-owned housing in the early nineties. As Sicherl concludes:
AA large share of fl ats occupied by their owners [90%] combined with a modest supply
of private, social and non-profi t fl ats limits the mobility of labour force.@ [Sicherl (2005)
p. 141] This is a signifi cant impediment to migration out of the higher unemployment
regions but this is also complicated by the dispersed pattern of industrial employment
that is characteristic of Slovenia and the culture that values local identifi cation. Only the
Ljubljana area appears to be able to attract the more mobile youth.
634
LABOUR MARKET POLICY
The abandonment of socialist self-management with its virtually guaranteed job
security and the adoption of a regulated capitalist labour market, the collapse of the
Yugoslav and central and eastern European markets and the resulting restructuring
of trade and of the internal economy, created a crisis in the labour market as jobs disappeared
and unemployment soared. The rise in social tensions that resulted, which
found expression in the strike movement, prompted, as we have previously noted, a
conciliatory response from government in the form of the gradualist privatisation process
and the creation of the tripartite Social and Economic Council. However, the rising
tide of unemployment also brought a labour market policy response to combat or offset
the perception that there would not be enough new jobs forthcoming to absorb the
displaced labour force.
The government=s initial labour market adjustment policies were designed to reduce
the size of the labour force and to ease the burden of unemployment for those who remained
in the labour force but became unemployed. The primary method of reducing the
labour force was encouraging mass early retirement through easy access to the pension
system, though expanding and prolonging education for young people about to enter
the labour market was also promoted and became an increasingly important element in
labour market policy as the decade progressed. Secondly, generous social and unemployment
benefi ts were paid while the defi nition of unemployment was suffi ciently broad
to allow unemployed workers to receive benefi ts even when earning income outside of

formal employment. These policies were adopted to appease labour and garner their
political support for the government.
These policies were highly successful in as much as the participation rate fell by 1.5
per cent between 1991 and 1993, as 14,000 people left the labour force, primarily due
to retirement. [Ignjatovic, et al. (2000) p. 10] 4 Between 1987 and 1993 the participation
rate for men fell by 8 percentage points, for women by 11 points. [Sicherl, et al. (2005) p.
141] The biggest declines were in the oldest age group, over 50 years, and the younger
age group, those under 30 years. [Vodopivec (2004) table 18.1, pp. 298-9] Furthermore,
the labour force continued to decline, though at a much lower rate, until 1996-7 when it
reached its trough. However, this decline in participation was insuffi cient to totally offset
the decrease in the number of jobs. Registered employment reached its lowest level
in 1997 after falling by over 200,000 from its pre- transition peak before employment
began increasing, albeit rather slowly. As a result registered unemployment continued
at very high levels until it reached a second peak in 1998. [Sicherl, et al. (2005) p. 142]
Although these policies and programs that encouraged a decline in the labour force
eased the unemployment and job destruction problem, they came at a cost, in the form
of a large increase in the number of pensioners and, thus, a resulting burden on the
pension fund even as fewer workers were paying into the fund; and, secondly, in heavy
payments in unemployment benefi t, unemployment assistance and social welfare. Indeed,
as Sicherl, et al. noted, Athe main burden of reduction and restructuring employment
in Slovenia was borne by pension and disability insurance@ as around 150,000,
or 15 per cent of all insurance payers, took early or disability retirement between 1988
and 1992. Over that period the proportion of pensioners in the population rose from
just under 17 per cent to 22 per cent, a thirty-two per cent increase. [Sicherl, et al. (2005)
p. 143] Many of these were premature with the result that an increased number of
pensioners were also younger and, therefore, a potential burden on the pension system
for a longer time. This was exacerbated, of course, by the fact that the decline in the
number of employed workers meant that there was an even greater increase in the ratio
of pensioners to insurance payers.
Changes to the pension legislation in 1993 that extended the normal retirement age,
however, brought an end to early retirement incentive as a labour market adjustment
policy to deal with the decline in jobs and the rise in unemployment. Consequently, the
numbers entering retirement fell back to normal or below normal levels. Still, workers
tended to retire as soon as they became eligible while the social security contributions
from employed workers required to fund the pension scheme were deemed excessive
and frequently the fund defi cit had to be paid for from general government funds. As
a result further restrictions on the pension plan were legislated in 1999 which tightened
eligibility restrictions, reduced the value of pensions, raised the retirement age
and encouraged late retirement (continued employment after the normal retirement
age) through enhanced late retirement pensions. The problem for these policies, as it
became evident, is that they appear to work only for higher income earners who are
generally the most qualifi ed while the unemployed and job losers are disproportionately
the low skilled and unqualifi ed. Furthermore, after 1997, the leading cause of the
fl ow of workers into unemployment was the termination of fi xed term (temporary and
contract) employment which exceeded the fl ows into unemployment from job loss and
4 Sicherl, et al. (2005) give a higher fi gure of 23 thousand and an additional 50 thousand between
1988 and 1991. See table 1.c, p.142.
635

new entrants to the labour force. Fixed term employment had become the dominant
form of new employment during the transition as fi rms utilized the fi xed term employment
contract to avoid the high job security (redundancy) costs associated with permanent
employment status and, thus, to provide >fl exibility= to the labour market.[Sicherl
(2005) p. 143] By the end of the decade, temporary employment comprised around 12
per cent of all jobs.
In the earlier stages of the transition, reliance was also placed on the unemployment
insurance system, a passive labour market policy, to ease the pain or restructuring and
unemployment. Unemployment insurance, initially introduced in 1974 and revised by
new legislation in 1991 (the Employment and Unemployment Insurance Act) was comprised
of two major social insurance tiers, the unemployment benefi t and unemployment
assistance supplemented by additional benefi ts such as transportation and relocation
payments and health, retirement and disability insurance provisions. It is compulsory
and covers all full-time employees, and part-time employees who work at least half of
full-time hours, who are on open-ended and fi xed term employment contracts. The selfemployed
could voluntarily enroll in the scheme.
Initially, the maximum benefi t period was two years, depending on length of previous
employment, and had an income replacement ratio of 70 per cent falling to 60 per cent after
three months. Eligibility to receive benefi ts required a qualifying period of insurable work.
Originally the period of employment required was 12 months of insurable work over the previous
18 months. Older workers nearing retirement age could extend the period of benefi ts
until they retired. New entry workers who had not yet accumulated the requisite months of
insurable work but who had completed an apprenticeship or training program of less than 12
months and remained unemployed, and those unemployed workers whose benefi ts had expired,
were eligible for unemployment assistance at a set rate which was not income related. 5
Workers who exhausted both unemployment benefi ts and assistance were eligible for meanstested,
family based social assistance. Reliance on social assistance has been rising along with
long term unemployment, whether measured in terms of expenditures on social assistance
( a four-fold increase in cash allowances between 1993 and 1998) or as a percentage of social
security payments (from 12.4% in 1993 to 29.8% in 1998).
Though the system of unemployment insurance was considered generous in comparison
with other transitional societies [Vodopivec (2004) p. 296], it was, in fact, generally
parsimonious relative to west European standards even before the tightening of
the system in 1998 which increased eligibility requirements and reduced the benefi t
period for most categories of workers. As early as 1993 Svetlik pointed out that labour
market programs, including unemployment insurance, were inadequate since in 1992,
only 38.5 per cent of the unemployed were eligible for benefi ts or assistance while the
newly introduced public works program provided employment for a mere 2,800 or 5 %,
of the 55,000 registered unemployed in 1991. [Svetlik (1993) p. 198] Stanovnik is even
more explicit:
5 AThe amount of the unemployment assistance is standardised and is the same for all benefi -
ciaries. It amounts to 80% of the guaranteed minimum income and can be paid for a maximum of
15 months. The possibility of prolongation is offered to an unemployed person who lacks a maximum
of 3 years to reach the retirement age. Such an unemployed may receive the unemployment
assistance until the retirement.@ [Ignjatovic, et al. (2000) p. 13]
636

The unemployment insurance system is probably the weakest within the overall
social protection system of Slovenia. In accordance with the Aworkfare@ doctrine, greater
emphasis in recent years has been placed on various active labor policy measures.
Even before the 1998 reform, entitlements for unemployment benefi ts could hardly be
described as generous, as the Organisation for Economic Co-operation and Development
(1997) has noted. Changes introduced in 1998 further tightened eligibility conditions
for the receipt of unemployment compensation, which is an income-related
unemployment benefi t. [Stanovnik (2004) p. 329]
The result of the tightening of eligibility in 1998 was a progressive fall in the percentage
of the registered unemployed receiving unemployment benefi ts. While the number
receiving benefi ts declined by half between 1998 and 2002, from 36,000 to 17,600, the
number receiving assistance doubled, from 2.8 to 5.6 thousand, no doubt refl ecting the
relative growth in long-term unemployment.
Other measures also challenge both the generosity and, indeed, the adequacy of
the unemployment insurance system during the Slovenian transition. One measure, of
course, is the percentage of the unemployed who received benefi ts which was a minority
throughout the period and, by 2001, had fallen to only one in four. The most direct indicator,
however, is the very small role that unemployment insurance payments played in
the overall social security system and, indeed, in the Slovenian economy generally. This
is indicated in table 6.8.
Given this low level of expenditure on unemployment benefi t and assistance, what
explains the determination of the Slovenian authorities to tighten what was already a
relatively parsimonious system in 1998? It must be remembered that the system inherited
by Slovenia on independence was fi rst implemented in the socialist self-management
period of virtual iron-clad job security such that the need for unemployment
insurance payments tied to previous work history and wages were minor.
Table 6.7
Recipients of Unemployment Payments: 1992-2002
Year Unemployment Unemployment Recipients as % of
Benefi ts Assistance Registered Unemployed
(Thousands) (Thousands) (%)
1992 32.5 18.2 45.0
1993 42.5 20.0 43.1
1994 31.4 11.0 42.1
1995 28.3 5.9 30.3
1996 33.7 4.1 30.3
1997 37.1 3.7 32.6
1998 36.0 2.8 32.6
1999 31.2 3.2 31.0
2000 23.0 3.7 29.1
2001 19.4 4.5 25.3
2002 17.6 5.6 23.6
Source: Stanovnik (2004) table 19.6, p. 330.
This is refl ected in the excessively low premiums paid by workers and employers, workers
0.14% of gross wages, employers only 0.06, which in 1997 covered only 9.2 per cent of
cash benefi ts. [Ignjatovic, et al. (2000) p. 15] Thus, the cost to the public treasury with the
abandonment of the commitment to job security appeared excessive.
637

Table 6.8
Social Payments as % of GDP: Slovenia and EU
Selected Years 1996-2000
1996 (passive) 1998 (passive) 2000 (passive) EU-15
% % %
Sickness, Health Care
and Disability 10.1 10.2 10.2 9.7
Old Age and Survivors Pensions 11.8 11.9 11.7 12.7
Family and Children 2.2 2.1 2.4 2.2
Unemployment (Stanovnik) 1.1 1.4 1.1 1.7
Unemployment (Sickert) 1.2 (60%) 1.3 (69%) 1.0 (58%) na
Other 0.5 0.4 0.4 1.0
Total 25.5 26.0 25.9 27.3
Source: Stanovnik (2004), p. 318, Table 19.1. Unemployment data broken down by active and passive, from Sickert
(2005) p. 154, Table 6.
These calls upon the treasury coincided with a strong neoliberal campaign within the
EU and the OECD to reduce social entitlements which were deemed an impediment to
labour market fl exibility and, thus, a cause of unemployment. In short, European and
Slovenian unemployment was considered to be structural, though there is little convincing
evidence to support this contention. This campaign refl ects the supply side, microeconomic
bias of neoclassical economics and ignores the demand side of the market, the
macroeconomic effects of reducing transfers to the unemployed on consumption and
thus on aggregate demand. In any event, to the extent that workers who lose their eligibility
for UB and UA move on to social assistance, the negative macroeconomic effects will
be tempered, though the negative effects on the employability of the affected workers of
replacing an earned entitlement with a means tested dole will be increased. 6
Much emphasis in recent Slovenian government reports, in social agreements and in
the EU programs and directives, such as the European Employment Strategy (EES), [Slovenia
(2004) p. 21] has been given to the transition from passive public transfer programs to
help the unemployed ( unemployment insurance payments) to active employment policies
though there does not seem to have been much movement in that direction in the second
half of the 1990s. Table 6.8 indicates that in the second half of that transition decade, the
percentage of expenditures on passive programs has remained at around sixty per cent
though it did peak briefl y in 1997-1998 at around seventy per cent. The 2004 National Action
Plan on Social Inclusion also gives a rate of 60 per cent for 2002. [Slovenia (2004) p. 21]
Active programs can be divided into two types: demand augmentation such as public
works programs, and supply enhancement programs directed at improving the quality of
workers seeking employment, and hence increasing their employability, through education,
training, work experience, and encouragement and incentives for self-employment.
In fact, of course, the line dividing the two is blurred by the fact that many of the education
and training programs are combined with work experience or on-the-job-training (OJT),
6 For a fuller discussion and evidence relating to these issues in a Canadian context see AEquality
of Opportunity, Reducing Disparities and Essential Services of Reasonable Quality: The
Evolution of (Un)Employment Insurance@, Affi davit of Professor Paul Phillips In the Matter of the
Employment Insurance Act and In the Matter of a claim by Kelly Lesiuk, Public Interest Law Centre,
Winnipeg, August, 1999, pp. 72-83.
638

though the majority of these programs are short term. 7 In the early years of the transition
emphasis was placed on demand generation in the form of public works. Introduced in
1991, public works employment was designed to provide work experience and on-the-jobtraining,
especially for those diffi cult to employ. This type of job creation peaked early in
the transition, in 1991 and 1992, when 0.83 and 1.17 per cent of the GDP respectively was
spent on this form of active employment policy. [Vodopivec (2004) p. 296] Since then it has
declined to less than half of one per cent of GDP. By 1999, some 10,296 unemployed, or
about 9 per cent of registered unemployed, were employed in public works programs which
are generally limited to a maximum of one year. However, of those so employed some 18 per
cent found regular employment through their public workers jobs as Amany of the public
works programmes have, in terms of content and organization, grown from being simply
an active employment policy measure into a regular activity.@ [Ignjatovic, et al. (2000) p. 20]
By 2003, public works accounted for almost a third of all spending on active employment
policy measures making it the most important of the measures in this category. It also has
a secondary benefi t in that it lowers the measured unemployment rate since those engaged
in public works are considered employed.
Second place in public expenditures in 2003 were wage subsidies in the form of government
subventions for contributions to social insurance which accounted for just over
a quarter of all government expenditures on social programs. Trailing in importance was
education and training programs though they are Aconsidered to be the most important
in the framework of the employment policy,@ [Ignjatovic, et al. (2000) p. 18] and feature
prominently in the tripartite social contract of 2004-6 and all government plans for the
future. [Slovenia (2004) p. 21] The numbers enrolled in the various training programs
appear quite impressive, rising from 10,768 in 1994 to 29,227 in 1998, but this is
somewhat misleading since most of the programs are short term and many individuals
enroll in more than one. Furthermore, the majority during the second half of the 1990s
were enrolled in Afunctional training@ which is primarily oriented to job search and career
counselling which does little to qualify workers for skilled jobs or create new employment
opportunities. The training program with the highest success rate for providing
more permanent employment, on-the-job-training, expanded at a rate comparable to the
total growth rate in education and training programs but without increasing its proportional
share. Furthermore, fi nancial support for active programs has not kept pace with
the total economy. APZ (Active Employment Policy) spending in 2003 represented just
0.3 per cent of GDP, signifi cantly below the levels of the late 1990s.
The other major active labour market program supported by the Employment
Service of Slovenia (ESS) was support for self-employment, though resort to self-employment
has generally been recognized as largely >involuntary= because Athere was
no regular job available for [the unemployed] and they had to make the ends meet,@
particularly in the earlier years of the transition. [Ignjatovic, et al. (2000) p. 19] If North
American experience is any indication, many self-employed will return to regular employment
as soon as jobs become available. Nevertheless, the program did have some
modest, though marginal and diminishing, success in the second half of the transition
decade. [Ignjatovic, et al. (2000) p. 20]
7 From 1994 through 1998, on average, over one half of all participants were in short-term
Atraining in job-seeking methods, planning of a professional career, motivation programs, programmes
of psycho-social rehabilitation and personal development, and similar.@ [Ignjatovic, et al.
(2000) p. 18]
639

In general, therefore, labour market adjustment policies can be said to have played
only a minor role in the transition period. Passive unemployment insurance payments
dominated, despite the emphasis in government policy documents on active programs
which played a generally very minor role over the whole decade, though public works
was probably more important in the very early years of the transition. Perhaps more
important in the longer run was the National Programme for the Construction of Motorways
(NPIA), the commitment of very large fi nancial resources, both Slovenian and
other European, to the construction of the national motorway system beginning in 1994
under the independent authority of the Slovenian Motorways Corporation (DARS).
The impact of this massive program had both macroeconomic and microeconomic effects
on the labour market. On the aggregate demand side, motorway construction
augmented the growth rate of the economy by almost one per cent per year between
1994 and 2002, growth which was estimated to increase employment by about 4,000
jobs per year. (Slovenia, Government Public Relations and Media Offi ce. [accessed December
28, 2005, http://www.uvi.si/eng/slovenia/background­information/motorwayconstruction/]
On the labour market structure side, motorway construction provided
many jobs for unskilled or unqualifi ed workers, a large number of them >guest= or
foreign workers, the vast majority of whom were from the southern republics of the
former Yugoslavia.
640
WAGES
Wages and employment are the two primary outcomes of the operation of the labour
market, though they are the product not only of market forces but also institutions, regulations
and legislative provisions as discussed in some detail in the previous chapter.
The capitalist labour market quite obviously offers a signifi cantly different incentive and
distribution system from that of the previous socialist self-management system. As well,
it introduced unemployment as a major factor in both wage determination and in the
distribution of income, a role for unemployment of comparatively minor infl uence previously.
Here we will be concerned only with the overall trends in wages and changes in
their relative sectoral levels with specifi c reference to human capital, age and gender infl
uences, with the impact of the introduction of minimum wages in 1995 and the welfare
system, and the consequences for the distribution of income and implications for social
exclusion.
The overall trends in wages over the transition period are given in table 6.9. 8 The
pattern revealed in the series indicate a plateau of relatively high real wages through the
late 1980s followed by a collapse during the turbulent early years of the transition from
1990 to 1992 when wages troughed, and then a fairly steady increase, averaging between
around 4 per cent per annum until 2004 when Slovenia entered the EU. The series also
indicate that manufacturing wages lagged slightly behind the economy average for most
of the recovery period as did market sector wages relative to public sector wages.
These observations are supported by Bole=s more intensive analysis of real wages in
the second half of the 1990s, though his estimates of real wage growth since 1995 are
8 The series in the table are from various sources and utilize different defi nitions and base years
hence are not exactly comparable. However, all have been recalculated on a 1992 = 100 base and, as
is evident, there are no major differences in the trends in these series.

somewhat lower (1.8% per year) than those calculated from the Bank of Slovenia=s fi gures
where the fi gure is closer to 3 per cent for the decade 1995-2004. [Bole (2002) p. 1]
These wage increases, however, were commensurate with the strong labour productivity
growth during the recovery decade.
Table 6.9
Real Wage Indexes, Slovenia 1986 - 2004, 1992 = 100
Year Bank of Slovenia Bank of Slovenia Bank of Slovenia Vodopivec
Real Net Wages Real Gross Wages Real Gross Wages Real Gross Wages
Total Manufacturing Incorporated Sector
1986 164.4
1987 161.2
1988 144.0
1989 166.5
1990 123.3 128.9
1991 109.9 99.2
1992 100.0 100.0 100.0 100.0
1993 113.3 110.2 108.9
1994 117.2 115.5 112.9
1995 122.4 119.2 117.9
1996 128.5 124.0 123.6
1997 132.4 128.1 127.4
1998 134.6 131.9 129.4
1999 138.8 135.5 133.6
2000 141.0 139.3 135.8
2001 145.7 142.3 139.7
2002 148.7 145.4
2003 151.5 146.2
2004 154.4 153.1
Source: Calculated from, Bank of Slovenia, Monthly Bulletin, October 1993, September 2005; Vodopivec (2004) Table 18.1, p. 298.
Other wage-trend patterns have been identifi ed in the transition process. As expected,
differentials did increase in the early years of the transition after the socialist selfmanagement
system, explicitly designed to promote wage compression, was abandoned.
[Vodopivec (2004)p. 311] In aggregate, this is indicated by the sharp rise in the Gini Coeffi
cient (before transfers) between 1983 and 1993 (table 6.10).
Table 6.10
Household Income by Source and Distribution, 1983-1993
1983 1993
Income by Source (percent)
Wages and Salaries 73.0 60.3
Self-Employment 6.6 9.5
Pensions 14.6 20.7
Other Social Benefi ts
(incl. Unemployment Insurance) 2.3 4.1
All other sources 3.5 5.5
Income Distribution Gini Coeffi cients
Gini Coeffi cient before transfers 0.3048
Gini Coeffi cient after transfers 0.2483
Source: Hanzek (1998) p. 67.
However, it should be noted that the increase in income inequality was accompanied
by a reduced reliance on the market as a source of household income, but the increase in
641

inequality in market income was largely offset by an increase in non-market transfer payments
from the government such that the Gini Coeffi cient after transfers increased only
marginally.
Differentials also increased for other reasons. Though male-female differentials did not
appear to widen in the early years of the transition, indeed perhaps fell due to the fact that
female occupations were less affected by unemployment than male occupations, they did
widen, albeit very moderately, between 1991 and 1995 before being reversed, presumably
perhaps by the introduction of minimum wages in 1995. [Vodopivec (2004) p. 306-7] Relative
wages did, however, increase somewhat for manufacturing and construction refl ecting
the relative performance of these sectors in raising productivity. [Bole (2002) p. 2] On the
other hand, as one might expect given the compression effects of self-management, returns
to education were quite dramatically increased in the early transition period.
642
The most dramatic changes associated with the transition occurred in the returns to
education; most of the change in these returns was over by 1993. The returns to more
educated workers increased monotocnically for all groups, with the highest increases
belonging to graduates of two-year colleges (visja sola) and, especially, four year colleges
(visoka sola).... [For this latter group] the wage premium over unskilled workers
... doubled over the six-year period rom 1987 to 1993: from 104 percent to 208 percent.
[Vodopivec (2004) p. 306-7. See graph p. 307]
After 1995, wage differentials by education remained remarkably stable.
The other major variable usually quoted as a measure of >human capital=, work experience,
for which the usual proxy is years of service, diminished throughout the latter1990s
as long service employees saw a reduction in return while shorter service employees saw
an increase in return, though seniority still continued to contribute a signifi cant return
to workers (1 per cent increase a year) by the end of the transition period. [Vodopivec
(2004) p. 307, 309] This >seniority dividend= was incorporated in the social contract and
collective agreements.
Most of these relative wage adjustments occurred in the early transition period and
began petering out by the mid-1990s. Not all of that was due to the working out of market
forces. Alarmed by the rise in inequality, poverty and low income in the transition
process, the social partners in 1995 agreed to the introduction of a legislated mandatory
minimum wage. Though, as noted previously, this caused some diffi culties in the collective
bargaining system, it did seem to halt the rise in inequality. The Gini Coeffi cient of
wage differentials did fall signifi cantly [Sickert (2005) p. 149], though it rose again slowly
by the end of the decade to its pre-minimum wage level. [Vodopivec (2004) p. 311]
One shift in relative wages that did occur was between the market sector and the
public sector. Though there were similar wage dynamics in both the market and public
sectors, public sector wages gained a signifi cant advantage in 1996, an advantage
which peaked at around 7 to 8 per cent between 1996 and 1998 before declining to 5 to
6 per cent by 2001. [Bole (2002) Figure 1, p. 8] As noted earlier, the public sector wage
policy introduced in the late transition period and continued after entry into the EU
was expected to further reduce the public sector premium. On the other hand, while
public sector wages were relatively high in comparison with other transition and developed
economies and with private sector wages, wage dispersion within the public
sector were comparable with the private sector, contrary to the feature common to
the public sectors in other developed countries where highly educated public sector

employers received pay below that of comparable market sector employees while less
qualifi ed public sector workers were better paid than comparable market sector workers
[Bole (2002) p. 2, fi g. 3, p. 10] This is revealed by the dispersion ratios in table 6.11
for the years 1997 and 2000.
Table 6.11
Wage Dispersion Ratios by Industry, 1997-2000
Industry Dispersion Ratios
(in GDP/capita wage equivalents) 1997
Median/ 9 th Decile/ 9 th Decile/
1 st Decile Median 1 st Decile
Manufacturing 1.505 1.897 2.855
Utilities 1.459 1.819 2.654
Construction 1.524 1.874 2.855
Wholesale/Retail 1.490 2.202 3.280
Hotels and Restaurants 1.474 2.581 3.804
Transport 1.522 1.608 2.447
Financial Intermediation 1.473 2.067 3.046
Public Sector 1.752 1.905 3.337
Average, all industries 1.525 1.994 3.035
2000
Median/ 9 th Decile/ 9 th Decile/
1 st Decile Median 1 st Decile
Manufacturing 1.552 1.890 2.933
Utilities 1.427 1.706 2.434
Construction 1.571 1.915 3.010
Wholesale/Retail 1.315 2.405 3.164
Hotels and Restaurants 1.478 1.887 2.789
Transport 1.541 1.602 2.468
Financial Intermediation 1.448 2.258 3.270
Public Sector 1.805 1.826 3.296
Average, all industries 1.517 1.936 2.920
Median Wage by Industry as Percentage of the Median Wage of the Lowest Wage Industry
1997 2000
(Manufacturing (Manufacturing (Wholesale/Retail
=100) = 100) =100)
Manufacturing 100.0 100.0 110.7
Utilities 145.2 138.4 153.2
Construction 101.3 96.5 106.9
Wholesale/Retail 110.5 90.3 100.0
Hotels and Restaurants 103.5 94.0 104.1
Transport 141.0 131.6 145.7
Financial Intermediation 171.0 153.9 170.5
Public Sector 153.9 146.3 162.0
Source: Calculated from Bole (2002), Table 1, p. 7.
What this table indicates is that, with the exception of manufacturing and construction,
there was a slight narrowing of most intra-industry differentials, particularly at the
upper end of the wage scale. [See also Bole (2002) fi g. 5, p. 12] Differentials between in-
643

dustries, indicated in the second half of the table, again appear to have narrowed slightly
although the relative wages in personal services and trade deteriorated signifi cantly relative
to manufacturing. Bole concludes,
644
Neither wage dispersion nor the median wage changed signifi cantly across sectors
during the period studied. In comparison with other economic sectors, only manufacturing
and construction made considerable progress by both criteria of wage incentive
structure..... value added in manufacturing and construction increased substantially
more (respectively by 17.2% and 24.5%) than GDP (14.2%) in the period 1997-2000.
[Bole 2002) pp. 1-2]
The one major increase in differentials was due to increased returns to education and
skills where two groups, those with university, non-university, and lower professional degrees,
and highly skilled workers increased their relative wages signifi cantly. In short, by
the second half of the transition decade, settled wage patterns and income distributions
indicate that the major transformation of the labour market was more or less complete
while the increased differentials associated with a market economy were being offset by
a combination of an indexed minimum wage and increased social transfers.
A SUMMING UP
The abrupt move from a socialist self-management economy to a capitalist market
economy, the separation of Slovenia from Yugoslavia and the consequent loss of a signifi
cant internal market, the collapse of markets in eastern Europe, and the transitional
depression that followed from these events created an abrupt change and a period of
turmoil in the Slovenian labour market. The key change was the abolition of job security
and its replacement by involuntary labour market mobility; that is, the move from virtually
guaranteed full employment, albeit frequently involving underemployment, to employer-initiated
unemployment, job search, and involuntary self-employment. In making
this change, ASlovenia removed one of the key characteristics of the socialist system B job
security, as the state gave up its role as a guardian and provider of jobs, and workers were
allowed to be laid off, and enterprises to fail.@ [Haltiwanger and Vodopivec (2002) p. 3]
The result, as expected, was a sharp rise in unemployment exacerbated by the depression
and the loss of export markets. The labour market adjustment process in reaction
to this unemployment was strongly conditioned by policy, institutions and values
inherited from the previous system. In particular, enforced retirement and induced early
retirement took the largest role in reducing the size of the active labour force and thus
the participation rate. Unemployment benefi ts augmented by a wide defi nition of unemployment
played some part in softening the impact on the unemployed while the labour
market was adjusting, though, as we have noted, these benefi ts were never a major player
in the adjustment process. An undetermined number of jobless also turned to the informal
sector for income while others became offi cially self-employed, at least until new
jobs began to be created. On the demand side, public works programs initiated in 1991
provided work and work experience for a signifi cant number of unemployed and for new
entrants into the labour market while expanded education and training programs not
only delayed the entry of many young workers into the labour market but also facilitatied
structural change by providing potential workers with the skills required by a changing

labour market. In the longer run, the potential supply of new entrants to the labour market
was also declining because of a low and falling birthrate.
Labour market adjustment was, however, facilitated by the larger macroeconomic policies
and social partnership institutions that permitted an early turnaround in the economy
and a gradual, and rather smooth, transition in property relations without imposing
unacceptable costs on the working class as happened in many other eastern European
countries. Of particular importance was the development of a comprehensive collective
bargaining system within the framework of mutually acceptable macroeconomic policies
developed and co-ordinated by the Social and Economic Council formed in 1994. The
strength of the local unions in dealing with their newly constituted employers allowed for
the devising of numerous strategic agreements to provide the fl exibility fi rms required to
adjust internally to the new market conditions and to raise labour productivity. Not least
of these fl exibility instruments was the increased use of fi xed term (temporary) contracts
for new hires, contracts that did not impose upon employers the considerable costs of
laying-off permanent employees. Furthermore, a relatively expansionary fi scal and monetary
policy, particularly with the construction of the national motorway system begun in
1994, provided the macroeconomic stimulus for fairly rapid economic growth.
Within a decade, the restructuring of the labour market was largely completed without
signifi cant confl ict and without the large social costs that plagued so many of the other
transitional economies. Employment growth had resumed and unemployment levels had
declined to levels below those in most other countries in the EU. 9 Major shifts have taken
place in the distribution of the labour force with a decline in agriculture and industry and
a strong increase in services, particularly in public services. Manufacturing employment,
though still declining slowly remained strong relative to the rest of Europe. 10 This was the
result of the continuing strength of the metal processing, electrical appliances, chemical/pharmaceutical,
food, wood processing and textile industries, of which the fi rst three,
plus rubber, were most successful in terms of revenue, employment and export fi gures.
[Stanojevic (2005) p. 14] Real wages had risen steadily across the board since the depression
trough and the initial increase in wage and income dispersion that had occurred with
the deregulation of the labour market had been stabilized at relatively low levels, at least
in part because of the implementation of an indexed minimum wage in 1995. Returns to
education, however, rose substantially while returns to work experience (seniority), though
still quite signifi cant, had declined. At the same time labour market mobility rates had also
stabilized at rates comparable with those in western developed economies.
This does not mean that there were no signifi cant problems remaining facing the
labour market by the time of Slovenia=s accession to the European Union in 2004. The
education level of the labour force still lags behind the European average. Though un-
9 Over the 2000-2004 period, only 8 of the 25 countries in the expanded EU had survey unemployment
rates that averaged less than Slovenia of which only one, Hungary, was a transitional
economy. Of those eight, two had unemployment rates as high or higher than Slovenia by 2004.
[IMAD, Slovenian Economic Mirror, vol. 11, no. 11, November 2005, p. A 15]
10 The 1996 Labour Force survey revealed that: ATaking tegether the traditional manual worker
group of plant and machine operators and [non-skilled labour] ... is strong, at 27.5%. In addition,
the proportion of the two largest groups (plant and machine operators and technicians) is higher
than the European average. The proportion of technicians is comparable to the proportion of employees
in Germany, but nowhere in Europe are there so many machine operators (the average is
9.9%).@ [Stanojevic (2000a) p. 27]
645

employment had been reduced to relatively low levels, at least in comparison with other
European countries, of the remaining unemployment, Aabout 60 per cent of people are
long-term unemployed of whom 47 per cent without education and 50 per cent elderly
people.@ Further, this fi gure had not changed much in recent years. [Sicherl (2005) p. 152]
Though these fi gures are not out of line with those in other European countries, they do
refl ect the legacy of the substantial restructuring of the labour market in the transition,
in particular the downsizing and closure of many traditional industries which previously
had employed many >work-skilled=, but lowly-qualifi ed workers. These redundant workers
were generally older and thus more diffi cult, more reluctant and more expensive
to retrain or re-skill. This does not mean that they can=t be retrained, only that it is not
deemed >economical= to do so since the cost of retraining would exceed the benefi t gained,
particularly since the actual resources devoted to retraining were really very limited.
Most Slovene authorities now view this residual unemployment as structural even
though the number of the unemployed considerably exceeds the job vacancies in virtually
all skill and education categories. As a result more and more attention has been
paid to active labour market programs in the form education and training. [See Slovenia
(2004) pp. 21-22] However, education and training alone, in the absence of demand side,
job creation programs where the most effective and effi cient re-skilling and training is
done on-the-job, merely converts unemployed, uneducated, low income persons into unemployed,
educated, low income persons. Furthermore, simply providing educational,
vocational and training programs will undoubtedly have minimal impact in dealing with
the most intractable and poorest strata of the unemployed and underemployed in Slovenia,
the Roma, who are now more or less restricted to irregular forms of work due to lack
of qualifi cations, functional illiteracy and employer discrimination.[Slovenia (2004) p. 2]
Nor will such programs have much effect in reducing regional disparities in employment
opportunities in the absence of accessible housing to accommodate migrating workers in
regions where jobs are being created.
Also in keeping with European perceptions of the causes of persistent unemployment,
Slovenian policy has also become directed at promoting greater >fl exibility=, which
is really not much more than a euphemism for increasing the proportion of the labour
market employed as contingent labour, thereby reducing job security and the proportion
of workers in full-time, full-year work on open-ended contracts. This was one motivation
behind the introduction of the Employment Relationships Act in 2002 which was
intended to promote more contingent employment. However, under pressure from the
unions, as passed the regulatory framework of employment was only moderately loosened.
[Sicherl (2005) pp. 148-49]
In fact, what has characterized the labour market transformation in Slovenia has been a
general resistence to the creation of a contingent labour force, except in the growth of fi xedterm
contracts which has created a form of market dualism based primarily on age. The
construction industry has been the one sector where continent labour, primarily fi xed-term
contract and foreign casual workers, have dominated. Women, and apparently employers as
well, have been particularly resistant to the growth of part-time employment which would
serve to lower women=s position of relative equality in the labour market inherited from the
previous socialist system. Nevertheless, there was also a growing recognition labour markets
tend to discriminate on the basis of sex where women=s wages were lower than men=s
because of both wage and job discrimination. That is, women were being paid less and for
the same work and were being shunted into lower wage, >women=s= occupations. [Slovenia
646

(2004) p. 9] This was an issue taken up in the 2004-2005 social contract which included the
recommendation for fl at-rate wage increases and profi t sharing to reduce differentials.
This resistance to the expansion of contingent labour, however, was not without its
cost to the workers. Slovenia is one of the few countries now in the EU where weekly
hours signifi cantly exceed the EU average. In other words, Slovenian labour market
fl exibility was achieved, not by expanding the contingent labour force, but by utilizing
long hours, overtime, shift work, and weekend work. This form of >work fl exibility= was
particularly prevalent in export-oriented, manufacturing fi rms with a less educated and
qualifi ed labour force. [Stanojevic (2005) p. 5]
The move to a capitalist, albeit regulated, labour market did involve some increase
in inequality of income, an increase that confl icted with the values of the old system. To
counter the tendency of capitalist labour markets to exacerbate inequality, the indexed
minimum wage was introduced in 1995 though this led to a new problem, a minimum
wage that exceeded the lowest wage categories in the lower branch collective agreements,
thereby distorting the strict schedule of qualifi cation-based wage differentials. At the
same time, minimum wages can only help those who are employed. At the end of th
transition period, 85 per cent of those eligible for social assistance were unemployed.
[Slovenia (2004) p. 5] For the unemployed and those unable to work for whatever reason,
low income can only be addressed by social transfers.
It is a somewhat ironic twist of fate that the move to a strict market economy resulted
in a falling portion of household income coming from the market and a higher proportion
coming from state transfers. As the 2004 Slovenian Plan on Social Inclusion reports,
Athere is a growing proportion of people whose predominant source of income is social
transfers.@ However, this raises an issue similar to that raised by the minimum wage, the
fact that transfers that guarantee only a minimum level of subsistence may be higher
than the wage for working. ASince the difference between the level of income from social
transfers and the lowest wages in not such that in itself it would stimulate work (and with
a lower level of social rights the actual prospect of subsistence would be questionable), it
is exceptionally important to provide these rights only to those that are not without any
other income through their own fault.@ [Slovenia (2004) p. 7] The Report recognized that
the only real answer to solve this problem and to provide work incentives and reduce
dependence on social transfers is to create more job opportunities at wages above the
poverty level and by increasing net wages for low income workers by reducing payroll
taxes and providing tax relief for children.
In general, however, these are problems that all developed capitalist economies with well
developed welfare state protections face. In that sense, they are indications that Slovenia=s
labour market transformation, as others have also concluded, was, by and large, complete
by the early years of the new millennium. The labour market remains highly regulated both
by legislation and by the collective and social agreements. Job security, though not as iron
clad as during the self-management era, remains high, at least for the 70 per cent of the
labour force in open-ended contracts. Wages have risen steadily since 1992 and remain
well above those in other transition economies. Poverty levels remained moderate (10.6 %
in 2000) at a level below the EU-15 average of 15 per cent. [Slovenia (2004) p. 5] Outside of
the unemployed, however, those most at risk of poverty, the disabled, children suffering
from poverty or social exclusion, adolescents with development problems, homeless people,
Roma, single parent families, and mental health cases, require specifi c, targetted social
programs, not general labour market programs or policies.
647

The gradualist approach to property rights transformation contributed to the >soft=
transition in labour-capital relations and, indeed, even a decade after the process began,
workers retain a fairly large stake in enterprise ownership while participative legislation
and institutions allow workers and unions to have a strong input in labour market adjustment
policies and processes. Despite recent criticism of the slow pace of privatization
and labour market deregulation, and of the high level of wages that marked the Slovenian
transition, there appears to be little evidence that this somehow weakened the country=s
growth and development. Stojanovic=s conclusion as to the contribution of the gradualist
approach to the labour market appears well founded: AThe relatively slow speed of
change has arguably enabled a soft transition to a market economy. The result has been
the preservation of a comparatively high level of social benefi ts for the population that
have reinforced trust between the social partners and a high level of motivation among
employees and their identifi cation with companies.@ [Stanojevic (2000a) p. 32] Progress
in the last decade and a half in lowering the unemployment rate, rising labour productivity
and real wages, with a consequent rapid rate of economic growth, would appear to
bear this out.
648

CHAPTER 7
THE POLITICAL ECONOMY OF THE
SLOVENIAN TRANSITION: 1945-2004
INTRODUCTION
In Slovenia, the economic change that accompanied the disintegration of Yugoslavia
was paralleled by a comparable transformation in the ideology and institutions of the political
system. Socialist self-management was replaced by Capitalist market economy and
the liberal state. The initial transformation took place over a fairly short period around the
years in which Slovenia declared its political independence and adopted its own constitution
and political system. However, political change did not end with the adoption of the
Constitution of 2001. The driving force propelling change was Slovenia=s goal of joining
the European Union. As a result, constant adaptations to the Slovenian political system
took place as part of the process of accession to the EU. One of the less acknowledged
side effects of this evolution has been the diminution of Slovenian sovereignty since independence
and the decline in the scope for democratic decision making in the country.
Slovenia opted out of subservience to federal political decisions made in Belgrade and
opted in to subjection to bureaucratic decision making in Brussels. This, of course, was
the price of EU membership, the ultimate goal of Slovenian politics since the 1980s.
Any account of the transition in the Slovenian political system must begin with the
Communist system that was adopted following the triumph of Marshal Josip Broz-Tito
and the Yugoslav National Army aided by the Slovenian National Liberation Front (the
Partisans) at the end of the 2 nd World War .
SLOVENIAN POLITICAL SYSTEM: 1945-1991
The 1946 constitution of Yugoslavia was patterned on that of the Soviet Union based
on the concepts of Ademocratic centralism@ (centralization of power in Belgrade) and a
one party state. As Luksic has noted, APower was concentrated and centralized in federal
executive organs and organs of the Communist Party of Yugoslavia which directed the development
of the entire country.@ [Luksic (2001) p. 3] The Slovenian constitution, adopted
in 1947, refl ected the very limited jurisdiction that the federal constitution provided the
republics. Control of the People=s Assembly and of government organs was in the hands of
the ACollective Presidency@ but given Slovenia=s subordinate status in the Yugoslav Constitution,
the Collective Presidency and the Assembly exercised little legislative sovereignty.
However, the Soviet style political and economic model prevailed only briefl y, until
the break with Moscow in 1948 and, after 1950, the move to the self-management economic
system and a pluralist, corporatist political system B or as its architect, Edvard
Kardelj designated it, Apluralism of self-management interests@. [Luksic (2003) pp. 511
ff.] The evolution of the political system began with the transformation of the Communist
Party from a political party that governed on behalf of the working class into the
League of Communists that was to represent only an avant-garde of the working class.
649

The political platform that contained the separation of the League of Communists from
the state and the transformation of the Party into an ideological and political avant-garde
was released in 1952, at the Sixth congress of the Communist Party of Yugoslavia.
The reasons for this radical economic and political project B the dismantling of the
state and ending single party control B lay in the failure of central, bureaucratic control
in a federation that was overwhelmingly peasant and with a highly diverse economy and
ethnic population. Central political control had also contributed to the alienation of the
population from Party offi cials centred in Belgrade. Thus began the process of de-etatization
(reduction of state control) in the sphere of production and in the communal (local)
government system, decentralization of political power in territorial terms along with the
disestablishment of the Communist Party.
This very much accorded with traditional Slovenian social values. Indeed, the theoretical
and ideological leader of this project, Kardelj, was from Slovenia where, historically,
there had been a weak attachment to liberal political values based on the abstract individual.
Rather a political tradition of collective interests existed, represented by Catholic
and Christian Socialist corporatist organizations and conceptions. Indeed, there was a
strong, anti-party culture in Yugoslavia and in Slovenia particularly and this was refl ected
in Kardelj=s thinking. Luksic writes,
650
In Kardelj=s estimation, political parties, regardless of how democratic they may
be, are unable to express the will of heterogeneous interest and therefore are also unable
to express the will of real human beings which are the embodiment of a range of
personal and social interests. ... [He] proceeded from the central belief that a citizen is
not abstract but concrete and therefore is imbued with his or her own specifi c interests.
[Luksic (2001) pp. 45-6]
These specifi c interests were best represented, not by political parties, but a pluralistic
network of self-managing institutions. Such a network based on corporatist lines was,
in his view, much more an embodiment of democracy that was a political party system.
In any case, his views guided the evolution of the Yugoslav political system which developed
its most pluralistic and effective form in Slovenia.
The culmination of this evolution was the constitution of 1974 and the Law on Associated
Labour of 1976. At the political level this involved the repudiation of institutions
of representative democracy and their replacement by the very complex delegational
system, a form of direct democracy. At the commune and republic level there were three
legislative chambers, one each representing local communities, workplace organizations,
and socio-political organizations. At the federal level there were two chambers, the federal
chamber composed of delegates elected by corporate organizations 1 and the Chamber
of Republics and Provinces elected by the republic and provincial assemblies. Each
republic also obtained a veto on federal legislation. The complexity of the system may
be understood when it is pointed out that in 1978 there were 544,000 elected delegates
to socio-political communities in Yugoslavia (all administrative territorial units of state
authority) plus almost 600,000 delegates elected to manage the affairs of economic organizations.
In short, in excess of one million people were directly involved through the
elected delegation system in political and economic management of Yugoslavian affairs.
1 These included all self-managing organizations and commune assemblies and candidates
nominated by a conference of the socio-political organizations, the League of Communists, Socialist
Alliance of Working People, Socialist Youth, Trade Unions, and the Veterans= Organization.

Economic organization and governance was equally complex as was the political structure.
Workplaces were organized as >basic organizations of associated labour= (BOALs)
and combined with other BOALs and Work Communities (offi ce operations) comprised
the Work Organization or the basic enterprise, which could combine with other related
organizations to form Composite Organizations of Associated Labour (COALs). COALs
were defi ned as Aassociation(s) of work organizations which are mutually linked by the
production of raw materials and the supply of energy, raw materials and intermediate
goods, semi-manufactures and/or parts for fi nished products, and through the sale of
goods and services ....@ [Yugoslavia (1977) p. 255]
At the social service and commune levels, there were also Interest Communities or Interest
Unions governing education, health, research, and community and social services.
Each of these organizations, communities and unions had elected workers, or workerconsumer,
councils. Social compacts, self-management agreements and similar contractual
agreements could be made between the economic and political organizations thereby
replacing the market and the state in an attempt to replace both the market and the
state as the determinants of economic and political values. Economic and social planning
was to be >from the bottom up.= The design of the political system, therefore, was for the
power of the political establishment to stem from associated labour, from the position of
the worker and individual within the sphere of labour, and not like in liberal capitalism,
from the abstract citizen lost in an anonymous election mechanism.
On paper, this appeared the epitome of political and economic democracy as, indeed,
in theory it was. In fact, it did work albeit imperfectly, particularly in Slovenia which had
the highest level of political and economic development in the country. But the political
transaction costs and the growth of monopoly arrangements enacted a high cost in lost
effi ciency which, no doubt, contributed to the economic problems of the 1980s when a
host of other problems, both domestic and foreign, beset the Yugoslav economy.
THE CRISIS OF THE 1980s
There is no dispute that Yugoslavia faced an economic and political crisis in the decade
of the 1980s though its impact may not have been felt as acutely in some parts of the
country, such as Slovenia, as in other parts. The major issue in dispute, however, remains
the cause of the crisis. Was the cause inherent in the political-economic system as many
orthodox economists and political scientists argue? Did the cause lie in the ethnic divisions
and the particular policies the politicians advocated and carried out with respect to
both the economy and the ethnic divisions in the country? Or was the cause external to
the country, originating in the policies, intrigues and economic fl uctuations of Europe,
the United States and the Soviet Union? That is, was the crisis precipitated by systemic
failure, political failure, or outside intervention?
A case can be made for all three, though a distinction must be made between what
constitutes the primary cause and which constitutes secondary or contributing causes; or
indeed, what is a result that has the appearance of cause. For instance, much has been
made of ethnic divisions, in particular the rivalries between the Serbs, Croats, and Albanians
(in Kosovo) which had precipitated political crises at various times in the past
and which Tito and the constitutional institutions (e.g. rotating presidency, autonomous
provinces, republican borders) had managed to contain prior to Tito=s death in 1980. But
651

these previous ethnic uprisings had occurred in periods of economic stress and were
overcome with the resumption of economic growth. Ethnic strife, therefore, can be seen
as the result of the economic crisis rather than the cause of it. It was the continuing crises
and the inability of the Yugoslav authorities to develop policies to overcome the economic
problems and >buy-off= ethnic confl ict that ultimately led to the disintegration of
Yugoslavia and the civil wars that followed, a disintegration from which perhaps only
Slovenia can be said to have emerged a longer-term winner. 2
To what extent can the crisis be said to have originated in systemic failure? The more
orthodox, neoclassical economists argue that the problem was inherent in social property.
Given that social property was >owned by everybody and owned by nobody= they alleged
that everyone expected to benefi t from public property without taking any responsibility
for it. The result was that self-managed enterprises paid out their total incomes in the form
of wages leaving nothing for depreciation and investment. Enterprises, therefore, were required
to borrow funds for investment and depreciation from their own, captive banks
which increased the effective money supply. This monetary expansion in turn fed infl ation
which was running in the 40 to 60 per cent per year range through much of the 1980s only
to accelerate into hyperinfl ation by the end of the decade. Given the decentralization of
monetary and fi scal authority, the federal government and the Yugoslav central bank was
politically unable to control the process.
Furthermore, the market mechanism that had proved to be so successful in the market
socialist period of the sixties and seventies had been partly superceded by the selfmanagement
agreements and social contracts entered into by enterprises and interest
unions as provided for in the Constitution of 1974 and the Law on Associated Labour
in 1976. The result was a progressive increase in monopoly power and an increase in
protectionism between republics which also served to drive up prices and infl ation while
allowing, at the enterprise level, a high degree of over-manning with the resulting fall in
labour productivity.
Complicating the picture further, the >withering away= of the offi cial central role of the
Communist Party left a policy, management and co-ordination vacuum at all levels of government
and the economy. This vacuum was fi lled by the unoffi cial role of the League of
Communists in controlling the election of delegates to enterprise management and local
government positions creating a form of >shadow= government. Legitimacy for the local
2 Diana Johnstone argues that, in the primary instance, it was Slovenian nationalism and manipulation
that, exploiting the economic crisis, led to the breakup of Yugoslavia. She writes:
Slovenian nationalism grew up as such a civilized, modern, continental European variety that
it was never even perceived as nationalism. It was indeed a new sort of nationalism: the exaltation
of EU membership over national sovereignty, expressed in terms of self-glorifi cation as antinationalist,
devoted to human rights, ecologically sensitive, industrious, deservedly prosperous,
and suitable to join Athe club@. Joining the club was indeed the overriding motive of Slovenian
separatism: leaving Yugoslavia was the way to join the rich man=s club ahead of the others. But
putting this separatism in terms of escaping from Serbian Aoppression@ gave it a more appealing
political dimension. Because it was simply a variant of EU chauvinism, Slovenian nationalism
was invisible in Europe. (Fool=s Crusade: Yugoslavia, NATO and Western Delusions. (Monthly Review
Press: New York, 2002) p. 137.)
Johnstone echoes the U.S. ambassador to Yugoslavia at the time, Warren Zimmerman, who
wrote AIn their drive to separate from Yugoslavia [Slovenes] simply ignored the 22 million Yugoslavs
who were not Slovenes. They bear considerable responsibility for the bloodbath that followed
their secession.@ (Quoted in Johnstone, p. 137)
652

political-economic elite was maintained by funnelling public monies to subsidize failing
and ineffi cient enterprises creating soft budget constraints that further weakened market
forces that would have encouraged effi cient operation, innovation, productivity growth,
and labour saving.
There is a certain legitimacy to this critique of the system though it did not, in fact,
emanate from the logic of social property or of self-management but rather from the
suppression of market forces and the failure to provide for coherent fi scal and monetary
policies or any effective mechanism for managing the economy. That is, it followed from
the >withering away= of the national state but, at the same time, the augmentation of the
powers of the republics, enterprises and local elites. The most egregious failure was that
of making the expansion of credit a subsidiary function of the enterprises themselves.
This would produce economic failure regardless of the form of property ownership. 3 In
the case of Yugoslavia, the subsidization of social enterprises and wages came in the
form of infl ation, an infl ation that was the most prominent and debilitating manifestation
of the crisis.
It is arguable that the systemic failures enumerated above were not the initiating cause
of the economic and political crises of the 1980s but rather contributed to the failure of
Yugoslavia as a nation to deal effectively with the destabilizing forces originating outside
the country. In the last couple of years of the Tito era, particularly 1978-1980 when Tito
was obviously dying, there was considerable anxiety that the country would succumb
to regional infi ghting based on very high regional income disparities. (The ratio of per
capita income between developed Slovenia and underdeveloped Kosova was at least fi ve
to one.) To quell regional unrest, money from western fi nancial markets was borrowed
and spent, but with little lasting accumulation of productive capital. In short, the debt
contracted, which tripled in the last few years of the decade to around U.S.$ 20 billion,
was largely consumed.
To this debt problem were added other unfavourable international developments,
particularly after Europe slid into recession in the early 1980s and began erecting protectionist
barriers to trade and reducing employment of Yugoslav guest workers. Although
Yugoslavia had special >developing country= trade arrangements with the EEC, its exports
were subject to frequent harassment by recourse to anti-dumping laws by European
competitors. In 1989, there were around 200 such cases. While Yugoslavia won appeals
in 90 per cent of these cases, they were largely pyrrhic victories since, by the time the
appeals were heard, the markets had been lost. Guest-worker remittances which in the
1970s were more than enough to pay the entire foreign interest payments, by the early
1980s had decreased by around 85 per cent. After 1982, interest payments exceeded
remittances.
However, the most important international development that undermined the Yugoslav
economy and exacerbated the internal ethnic tensions was the international debt crisis
initiated by the United States with the adoption of monetarism and the jacking up of
3 Arguably, this was the case of the massive failures of the giant private multinationals in the
United States with the crash of the technology bubbles and the exposure of the corporate frauds
in the late 1990s and the fi rst few years of the new millennium. Companies could fund investment
either through stock issuance or through fraudulent accounting practices which made available
borrowed funds, providing soft budget constraints, subsidizing corporations and infl ating stock
values. These values were monetized until the bubble burst bringing a crash in asset values, bankruptcies
and a loss of individual savings held in stocks, pensions and investment funds.
653

interest rates. Thus the interest on foreign debt tended to accumulate, increasing net foreign
indebtedness without any infusion of offsetting capital or capital goods. This meant
a shortage of new investment particularly in imported capital goods which embody new,
productivity-increasing technology, thereby contributing to continued economic stagnation
which, in turn, added to the burden of the foreign debt.
Yugoslavia turned to the International Monetary Fund (IMF) for help. This only made
the problem much worse as IMF conditions demanding austerity deepened the economic
crisis which fed and expanded the political crisis. Michael Parenti writes:
654
[Yugoslavia] decided to borrow heavily from the West in order to simultaneously
expand the country=s industrial base, its export production, and its output of domestic
consumer goods. But when Western economies entered a recession and blocked
Yugoslav exports, thereby diminishing its export earnings, this created a huge debt
for Belgrade. And the massive debt began to develop its own interest-fed momentum.
In short order, as in so many other debtor nations, the creditors, including the World
Bank and the International Monetary Fund demanded a Arestructuring..@ Restructuring
consists of a draconian austerity program of neoliberal Areforms@; wage freezes,
the abolition of state subsidized prices, increased unemployment, the elimination of
most worker-managed enterprises, and massive cuts to social spending.... Restructuring
wreaked its neoliberal havoc. [Parenti (2000) pp. 19-21; see also Johnstone (2002)
pp. 21-23; Chossudovsky (1997) pp. 243 ff.; and Woodward (1995) pp. 45-67]
The neoliberal havoc that followed the debt crisis had direct political consequences,
the ramping up of regional nationalism. As Johnstone notes, Aa chain of causality led
from the >debt trap= to the IMF reforms to the economic crisis of the 1980s to the nationalist
explosion of the 1990s.@ [Johnstone (2002) p. 23] The initial macro-economic reform
program was implemented in 1980 with resulting slower growth, rising foreign debt, and
falling living standards. A second IMF mandated >stabilisation program= was instituted
in 1983. Combined with import liberalization, a credit freeze and devaluation, industrial
investment and growth plummeted and infl ation took off. An >anti-infl ation program=
introduced in 1988 served only to speed up the rise in prices and, with wages frozen, falling
real wages. One result was uprisings in Vojvodina and Montenegro. [Chossudovsky
(1997) p. 245]
In December of 1989, when Yugoslav Prime Minister Ante Markovic announced his
latest economic reform package to combat hyperinfl ation and economic decline, he also
began the dismemberment of Yugoslavia=s system of socialist self-management and the
creation of capitalist labour and capital markets. The austerity program, launched in
January of 1990 in conformance with an IMF Stand-by Arrangement and a World Bank
Structural Adjustment Loan had all the characteristics of what has now become known
as the AWashington Consensus@ 4 B expenditure cuts, wage freezes, convertibility of the
dinar (at an overvalued rate), liberalisation of interest rates, deregulation of prices, reduction
of import quotas, bank reforms and a freeze on payments to the republics B
produced economic collapse, and hyperinfl ation, on an unprecedented scale. As Chossudovsky
concludes:
The IMF-induced budgetary crisis had engineered the collapse of the federal fi scal
structure. This situation acted in a sense as a fait accompli prior to the formal declara-
4 For a devastating attack on the AWashington Consensus@ as a solution to the economic and
debt problems of developing nations, see Stiglitz (2003).

tion of secession by Croatia and Slovenia in June 1991. Political pressures on Belgrade
by the European Community combined with the aspirations of Germany to draw the
Balkans into its geo-political orbit had also encouraged the process of secession. Yet
the economic and social conditions for the break-up of the federation resulting form
ten years of Astructural adjustment@ had already been fi rmly implanted. [Chossudovsky
(1997) p. 247]
It must also be recognized that the international impetus for the Anationalist explosion@
was not restricted to the actions of the IMF and the WB in exacerbating the economic
crisis. The United States was directly involved in the economic and political destabilization
of Yugoslavia from the early 1980s. 5 Germany was also involved in supporting
Croatian and Slovenian independence and in funnelling arms and military equipment in
support of the independence of Croatia and Slovenia while the US blocked attempts by
federal authorities to prevent the arming of the breakaway republics. 6
What, then, can we make of these various explanations for the disintegration of Yugoslavia
in the early 1990s? And what were the political forces operative in Slovenia that
contributed to the implosion? To the fi rst question it is clear that the economic crisis
that had its origins in the >debt trap= played perhaps the most important initiating role
but a role that was made much more serious by the >withering away= of any central state
authority that could introduce policies that would counter the crisis. Furthermore, by
allowing the neoliberal international agencies, the IMF and WB, to dictate the terms of
economic policy, failure to solve the economic problems was virtually assured. Attempts
by Belgrade to reassert federal authority and introduce economic policies mandated by
the IMF aroused further estrangement from the dissident republics and provinces, not
least in Slovenia which objected to paying for transfers to the lesser developed regions
where they appeared to be absorbed in unproductive, nationalist expenditures. The intervention
of foreign governments, in particular Germany and the United States, merely
assured that a domestic Yugoslav solution was not possible. The subsequent dismemberment
of the country had minimal direct affects on Slovenia though, as we have pointed
out in previous chapters, it did have a serious, though transitory economic effect on the
new Republic.
5 AThe objectives of economic and Astrategic restructuring@ were carried out concurrently. The
former was to reinforce the latter. Washington=s intervention in this regard had been formalised
in 1984 in a US National Security Decision Directive (NSDD 133) entitled AUnited States Policy
towards Yugoslavia@ labelled ASECRET SENSITIVE@. A censored version of this document was declassifi
ed in 1990; it largely conformed to a previous National Security Decision Directive (NSDD
54) issued in 1982 pertaining to Eastern Europe. The objectives contained in the latter document
included Aexpanded efforts to promote a >quiet revolution= to overthrow Communist governments
and parties@ while reintegrating the countries of Eastern Europe into a market-oriented economy.@
[Chossudovsky (1997) p. 244]
6 AArms shipments and military advisers poured into the secessionist republics of Slovenia
and Croatia, particularly from Germany and Austria. German instructors even engaged in combat
against the Yugoslav People=s Army.@ [Parenti (2000) pp. 26-27] AOn 17 January 1991, the United
States made a decisive intervention on behalf of Croatian secession. The U.S. ambassador to Belgrade,
Warren Zimmermann, informed [Yugoslav President] Jovic that the United States would not
accept any use of force to disarm the [Croatian] paramilitaries.... The Yugoslav army was prohibited
by the United States from using force to preserve the Federation, which meant that it could not
prevent the Federation from being dismembered by force.@ [Johnstone (2002) p 24]
655

656
THE SLOVENIAN POLITICAL SYSTEM AND THE CRISIS
While these geopolitical forces were acting on Yugoslavia, what of the political forces
acting within Slovenia? While accepting that Athe insensitive interventions of the world@
was a key factor in the disintegration of Yugoslavia, Slovenian political scientists Fink-
Hafner and Lajh place more emphasis, at least as far as Slovenia is concerned, on the
growing diversity in structure, culture and ideology among the republics and autonomous
provinces such that Athey were unable to defi ne any single system of regulation to
satisfy all the units.@ [Fink-Hafner and Lajh (2003) pp. 38, 40]
Slovenia was considerably both more >European= and more developed than other parts
of the Federation. From the very beginnings of post-war Yugoslavia, Slovenia had maintained
its maximum independence from Belgrade, as much as the constitution allowed.
Increasingly by the 1980s, the level of economic, political and cultural development and
the growth of a pluralistic, civil society led Slovenes to identify culturally and politically
with western Europe and in particular with Austria and Germany rather than with their
Balkan partners. This was one factor in the declining legitimacy of the socialist political
hegemony which was also being challenged by the fall of the Berlin wall and the emerging
disintegration of the Soviet Union. Slovenia had also developed political-economic
ties with Austria and Italy, in particular in the form of the Alpen-Adria association that
promoted commercial, cultural and political exchanges between the contiguous regions
of these countries.
Increasingly, then, the cultural attraction of western Europe and the European Economic
Community, as it was known then, became a Slovenian fi xation. It has been suggested
that if the EEC would have accepted the whole of Yugoslavia as a potential member
at that time, Slovenia might not have felt the necessity of political independence to
>join Europe=. However, entry into the European Community required both a certain level
of economic and social development and also political >reform= (abandonment?) of its
socialist system. The rest of Yugoslavia was considered neither to have that level of development
nor the willingness to introduce the political reforms necessary to be acceptable
as a candidate for EEC membership. Slovenia began to accept the necessity of a greater
independence as a precondition of European membership, though at least initially, it was
willing to entertain the idea of a more asymmetric federation B what the Quebec separatists
in Canada had called Asovereignty-association@, as an alternative to a complete break
with the other Yugoslav republics.
It is hard to believe that it was possible for the Yugoslav republics to have more independence
than they already had by the late 1980s and still be considered a single country.
In any case, the need to re-establish central controls on the national economy in order to
implement the economic >reform= demands of the IMF, WB and European fi nancial institutions
was forcing Belgrade in the opposite direction, a direction that Slovenia completely
rejected. The accession of centralist Slobodan Milosevic to the leadership of the Yugoslav
League of Communists in 1986 and changes to the federal constitution in 1988 giving the
federal government more power were strongly opposed by Slovenia. Relations with Serbia
subsequently deteriorated as Serbia declared an economic embargo on Slovenian goods
and undermined the national fi nancial system by printing money to fi nance the Serb state.
As Fink-Hafner and Lajh have concluded, Awhen the (re)centralising federal system became
clearly dysfunction for the most economically developed parts (especially Slovenia), this
type of federal system became problematic.@ [Fink-Hafner and Lajh (2003) p. 46]

Politically, Slovenia began moving in the direction of disassociating itself from the Federation.
The most important step was the adoption of constitutional changes providing
for a multi-party electoral system for the 1990 election, a new basis for elections to the
assemblies and the presidency, and dropping >Socialist= from the name of the republic. In
the following election contested by 15 of 34 registered parties, nine parties were successful
in electing members to the parliament. A number of these parties were in fact directly tied
to factions within the previous socialist-communist organizations. The strongest party that
has emerged from the earlier socialist system was the Liberal Democrats which was previously
the League of Socialist Youth of Slovenia. The United List of Social Democrats was
formed in 1993 out of the remnants of the old League of Communists and other socialist
parties. The Slovenian People=s Party was established in 1988 out of the existing Association
of Slovenian Farmers while the Democratic Party of Pensioners of Slovenia emerged
from older pensioners= organizations. The Social Democratic Party was founded in 1989
out of a union dispute between the new >independent= unions and the older, established
communist unions. Also, the fi rst president of Slovenia, elected in 1990, was Milan Kucan,
the former President of the League of Communists of Slovenia. He was re-elected as an
independent candidate twice, in 1992 and 1997.
However, there also emerged parties from the pre-socialist political culture, in particular
the Christian Democratic Party which represented the older Catholic block. It was
one member of the anti-communist, centre-right DEMOS coalition that gained a narrow
majority in the 1990 election, 126 of the 240 seats in the three houses of the assembly. 7
However, this coalition proved unstable and inexperienced in government and was replaced
by a left-centre coalition led by the Liberal Democrats headed by Janez Drnovsek,
former President of the Yugoslav Presidency, before the 1992 election. Nevertheless, the
DEMOS coalition remained in power long enough to hold a referendum on secession
from Yugoslavia (December 1990, 89 per cent in favour) and preside over the declaration
of independence (June 25, 1991) and the adoption of a constitution for the new country
(December 1991).
According to Luksic, the 1991 constitution embodied Aliberal, socialist, democratic
and corporative principles.@ [Luksic (2001) pp. 9-10] It was liberal, he notes, in that it
incorporated protection of human rights, the rule of law, division of powers, the separation
of church and state and the protection of competition. It was socialist in that it
provides for a welfare state, the right of workers to form unions, to strike and to take
part in decision making, and the right of all to suitable housing and a clean and healthy
environment; and it was democratic in that it provided for free elections putting power in
the hands of the people. But, he adds, it was also corporative in that it created a second
house of parliament, the National Council, which is elected from interest constituencies
and in addition provides for self-managing units for particular functions and public administration.
Further, it provides special protection for the Italian, Hungarian and Roma
ethnic minorities.
Indeed, the pluralistic-corporatist heritage of the previous socialist system is evident
in the structure of the National Council. It is composed of 40 councillors, 22 representing
7 The composition of the DEMOS coalition was the Social Democratic Party, the Christian
Democrats, the Slovenian People=s Party, the Green Party, the Liberal Party and the Democratic
Party. Since then, the Green Party and the Democratic Party have joined with the Liberal Democrats
and in 2000 the Slovenian People=s Party and the Christian Democrats merged to form a heavily
rural, right of centre-oriented party.
657

local territories, 18 representing functional economic groups such as unions, employers,
farmers, and professionals, and the education, social security and health sectors.
However, it has very limited powers. It can make policy proposals and give advice to
the main legislative body, the National Assembly; it can conduct inquiries and initiate
referendums; and it can return legislation passed by the National Assembly back to the
Assembly for reconsideration but the Assembly can re-enact the legislation with a twothirds
majority. Thus its >veto= power is essentially only the power to delay and force a
second look at legislation. [Fink-Hafner and Lajh (2004) p. 58] Election to the National
Council is indirect, from electoral bodies of representatives of local community councils
and representatives of interest group organizations.
The Constitution also provides for a directly elected President who must gain a clear majority
of votes cast, either in the initial election or in a subsequent run-off election if there were
not a majority winner in the initial vote. However, the Presidency is a very weak position with
largely ceremonial, >head of state= functions. The one signifi cant function is the President=s
power Ato nominate the Prime Minister and even to dissolve the National Assembly and call
new elections when no candidate for Prime Minister obtains the requisite majority of votes.@
[ Fink-Hafner and Lajh (2004) p. 59] 8
The National Assembly is the real seat of legislative power and is presided over by
a president elected from among the deputies. Executive power, however, is wielded by
the government administration which is headed by ministers nominated by the Prime
Minister. These ministers can not be members of the Assembly thereby ensuring the
separation of the legislative and executive branches of government. 9
The electoral system used for the 1990 election was a decidedly mixed combination
of systems, proportional balloting for the socio-political chamber, >fi rst-past-the-post= for
the associated labour chamber, and absolute majority for the local communities chamber.
Indeed, the 1991 Constitution contained no provision for a voting system because of a
dispute between the right which favoured a majority system and the left which favoured
proportional representation. However, before the 1992 vote, an electoral law was adopted
which provided for a variation of the proportional system based on 8 electoral divisions
with 11 deputies each but also incorporating national lists with a 3.3 per cent threshold.
This system was revised by a constitutional amendment in July 2000 which retained the
8 electoral divisions of 11 members each but established a 4 per cent threshold and eliminated
the national lists. Two deputies are elected on a fi rst-past-the-post system from
special ethnic constituencies of the Italian and Hungarian minorities.
Despite the number of parties contesting the elections and electing deputies since independence,
governments, with a couple of exceptions, have been remarkably stable. This
is despite the fact that no party has ever achieved a majority in the Assembly. However, the
coalitions formed, all but the two short-lived right-wing blocks, have generally been suffi -
ciently consensual that frequent government or administration changes have been avoided.
There are a number of reasons that can be advanced for this stability. The fi rst has been the
consistent and growing strength of the Liberal Democrats (LDS). In the 1990 election the LDS
8 These are the same powers that the Canadian head of state, the Governor General, has with
respect to the Canadian parliament.
9 In this respect, the Slovenian system is similar to the American. However, the Prime Minister
is not, as is the case in the United States, directly elected but rather is nominated by the President
and voted on by the Assembly and is normally the leader of the party with the largest number of
seats in the legislature.
658

eceived 14.5 per cent of the vote, second only to the United List (Reformed Communists) but
ended up with slightly more seats. In any case, the resulting government was formed by the
right block coalition which had 47 of 80 seats in the socio-political chamber with 45 per cent
of the vote. 10 The Liberal Democrats headed the short lived centre-left coalition after the fall of
the DEMOS government and then in the 1992 election the LDS support rose to 23.4 percent.
It continued to rise in subsequent elections, in 1996 to 27 per cent and in 2000 to 36.3 per cent
when it won 34 out of 90 seats (39 per cent of the 88 party contested seats).
LDS based coalitions have only once in the post-independence period lost power, in
the short period of June to November of 2000 when Prime Minister Drnovsek lost a vote
of confi dence in the Assembly and one of his coalition partners, the Social Democrats
switched sides and voted with the merged Christian Democrats and Slovenian People=s
Party. However, in the subsequent election, the right block coalition lost badly and the
LDS again led the governing coalition. For most of the period of independence, elections
have favoured, albeit weakly, centre-left parties, perhaps refl ecting the increasingly urban
population that tends to vote left rather than right as, disproportionately, the rural
population does.
What is perhaps somewhat unique is that most of the coalitions put together by the
LDS have been >grand coalitions=, that is involving parties from both the left (socialist)
and right (conservative, catholic) as well as the liberal, centrist (perhaps slightly left of
centre) LDS. For instance, the 1993-6 grand coalitions included both the Christian Democrats
and the United List among other parties as did the 2000-2002 coalitions. Luksic
credits the anti-party bias of Slovenes for this ability to compromise and seek consensus
though it could also be a manifestation of the slow, one could say >conservative=, pace of
changes in the system and the rejection of rapid privatisation and >shock therapy= of the
economy after the fall of the fi rst right-block government in 1992, a consequence in part
of opposition to its inept radical >reform= program.
However, it probably equally refl ects the continued adherence to corporatist values
and institutions that Luksic also identifi es. The National Council is one such corporatist
institution. He writes:
... the corporative tradition has always played an important role in the political life
of Slovenia. With few exceptions, interest groups and professional associations enjoyed
precedence over parties, the community enjoyed precedence over the market and
authentic man enjoyed precedence over the notion of an abstract citizen. The National
Council embodies this uniquely Slovenian interpretation of political life. The National
Council, and its deputies made up of members of various associations, chambers and
unions, represents the central tenet of political corporatism. In this sense, although
the National Council has limited powers, it plays an important stabilizing role.[Luksic
(2001) pp. 25-6]
Perhaps even more indicative of the corporatist tradition in Slovenia is the Economic-
Social and Ecomocic Council, established in 1994. The Council includes fi ve government
representatives, fi ve from the trade unions and fi ve representing employers. It meets
regularly to discuss and develop positions on social and economic matters including fi scal,
budget, and labour market policies, and social programs. While the Council itself
does not have legislative powers, it has had growing informal power and every year or
so since 1995 has concluded a series of social contracts establishing agreed and binding
10 Calculated from Luksic (2001) p. 21, Table 2; and Fink-Hafner and Lajh (2004) p. 57, Table 5.
659

measures regarding most economic and social issues that relate to the welfare of workers
and the general population, including minimum wages and incomes policies. Detailed
wages at various levels and industries are determined through direct collective bargaining
between delegates from the unions and those from the employers. The system of
co-determination at the workplace, borrowed from Germany, is another manifestation
of economic corporatism which also incorporates some aspects of the previous self-management
system.
660
>EUROPE MANIA=
Despite the corporatist and anti-party traditions in Slovenia, it was the >European
ideology= that guided the political approach of almost all the political parties, left, right
and centre, since the eighties and that has provided the stability to the political system
that we have observed in Slovenia over the past decade or so. Except during the brief periods
of right-block government and despite some domestic disputes over implementing
policies dictated by the EU as conditions of accession, the desire to become part of the
European Union triumphed over domestic concerns and political differences among the
parties. Even the League of Communists adopted European entry as its campaign slogan
for the 1990 election. The consensus on Europe was made explicit in 1997 when all the
parties in the National Assembly endorsed a special agreement pledging co-operation in
the period leading up to EU accession. Slovenes, particularly the elites, concluded that
Ajoining the club@ was the only alternative as a survival strategy in the post-Yugoslavia
world. However, this was not a conclusion based on analysis of the economic pros and
cons of membership in the EU but rather on what Fink-Hafner and Lajh have labelled,
AEuro-euphoria@ [Fink-Hafner and Lajh (2003) p. 78], a unquestioned belief that EU membership
would Aconsolidate the democratic political system and strengthen the free-market
economy.@ [Fink-Hafner and Lajh (2003) p. 74]
That belief was never rationally challenged despite the rise of a number of ideological
confl icts and the future loss of economic and political sovereignty that will
result from the adaptation of the Slovenian Constitution and legislation to conform
to Europe=s dictates. The fi rst major political issue that arose came soon after Slovenia
applied for EU membership in June, 1996 though the matter was fi rst raised by
Italy during the negotiations that led up to the Europe Agreement between the EU
and Slovenia. The Europe Agreement provided for political dialogue, the promotion of
trade, technical and fi nancial assistance from the EU to assist in moving Slovenia into
conformance with European law and practices, and the institutional framework for the
integration of Slovenia. The agreement was signed the same day that Slovenia applied
formally for membership though it was some time before it actually took effect. The
issue was Italy=s opposition to a constitutional prohibition of land ownership in Slovenia
by foreign citizens which clearly violated European legislation. A year later, after a
strong and prolonged debate, Slovenia acceded to Italy=s position and the Constitution
was amended in accord with European law. Subsequently the Europe Agreement was
ratifi ed by the Slovenian parliament.
However, the land ownership law was not by any means the only constitutional or
legislative provision that had to be amended in order to conform to the acquis communautaire,
the obligations of EU membership established in the treaties, policies, decrees and

legislation of the Union. Over the following six years, the Slovenian government, and a
negotiating team directed by the Prime Minister and his Council of Ministers, conducted
negotiations for the country=s accession which were successfully concluded in 2003.
Though the word used is Anegotiations,@ in reality Slovenia=s politicians were restricted
in negotiating only how Slovenian law and practice would be adapted to Europe=s. This is
clearly pointed out by Fink-Hafner and Lahj:
There is strong awareness that Slovenia decided to join the EU and not visa versa,
and hence it is necessary to speak about the synchronisation (i.e. changing) of the
Slovenian system in line with the EU=s system. The key part of the negotiations therefore
has taken place at home, which has also triggered some serous domestic confl ict.
[Fink-Hafner and Lajh (2003) p. 141]
While confl ict may have been triggered, the consensus >that there was no alternative=
meant that there was little room for ultimate disagreement. Fink-Hafner and Lajh go on
to make it clear that this was a case of >policy taking= and not of >policy making.=
The acquis communautaire is the result of 50 years of agreements and compromises
made by the leading European countries concerning economic and political power.
Therefore it is hard, or better practically impossible, to expect that the acquis could
be changed. As a result, the most that candidate-countries can get in the >negotiations=
is perhaps a few additions to the acquis or delays (i.e. transitional periods) in its
implementation.... In the negotiating (accession) process, candidate-countries have
therefore very little space for negotiations, while the EU is always one step ahead of
them with its >take it or leave it= approach. The story of candidate-countries= legislative
alignment and fulfi lling of the conditions for EU accession is thus above all an internal
story about reforms that will contribute to candidate-countries= EU membership.
[Fink-Hafner and Lajh (2003) p. 149]
Thus, the scope for policy making was exceedingly narrow which virtually ruled out
serious ideological differences. Once all parties accepted that the only option was entry
into the European Union, major debate in parliament was virtually precluded. The political
and economic agendas in the legislature of Slovenia were largely determined by the
overarching neoliberal agenda of Brussels.
THE FUTURE OF POLITICS
The constitution of Slovenia has been amended so that the executive wing of government
has more power to adapt to EU strictures. [Fink-Hafner and Lajh (2003) p. 169]
In other words, the >democratic defi cit= that exists in the EU structure where the bureaucracy
lacks effective democratic controls, now also constrains Slovenian decision
making. Slovenia, knowingly though perhaps somewhat grudgingly, has surrendered a
great deal of its political and economic sovereignty to a supranational organization. In
2007 when the country joins the European Currency Union (ECU) it gives up another
major fi eld of economic sovereignty when it loses control of monetary policy. In fact, it
is at least arguable that the political options facing Slovenia in the future will be more
constrained than they were in the old Yugoslavia. Whether the expected economic
gains will be worth the loss of sovereignty, democratic powers and many of the trappings
of statehood, however, only the future can tell.
661

CHAPTER 8
POLITICAL CHANGE AND FISCAL POLICY: THE ROLE
OF THE BUDGET IN THE SLOVENIAN TRANSITION
The move from self-managing socialism to capitalist market economy involved a major
transformation in the role of the state. The attempt in the 1974 constitution to reduce
the state=s role by decentralizing power and establishing self-managing interest unions
and enterprises linked by social contracts to provide not only commercial goods and
services but also social or public services was only partially successful. The reason was
that the state at the federal and republic levels withdrew from its managing and coordinating
role leaving the local party elites to fi ll the void in the form of an unoffi cial
shadow management structure. Indeed, before 1992 there were over 6000 separate public
sector budgets in Slovenia. Thus when the self-management system was abandoned at
the end of the 1980s, the state had to reassert its management and co-ordinating role by
assuming responsibility for the public sector, social and economic infrastructure, social
programs and social services. With independence in 1991, Slovenia had also to provide
for defence, border services and security, and international relations.
In other words, independence and the switch to parliamentary governance necessitated
a new economic and social role for the state, a role that is largely implemented
through the fi scal and budgetary policies of the government. The budget becomes the
most crucial reference point for assessing the long-term economic and social policies of
the government, laying out the direction, composition and objectives of policy and the
methods to achieve these goals. In doing so, it also establishes the criteria of success B
the extent to which the country as a whole achieves these goals. The budget and the fi scal
policy that it contains, therefore, is a profoundly political document and refl ects the
revised political orientation of the newly independent state.
However, the budget is not only a political document. It is also an administrative or
management instrument which sets out, not only the objectives, but also the means by
which they are to be obtained while simultaneously limiting the state=s expenditures and
accounting for how such expenditures are to be funded.
Finally, the budget is an economic document, a tool for managing and encouraging
the growth of the economy. In this regard, the budget operates at two levels, >micro budgeting=
and >macro budgeting.=
662
Macrobudgetary decisions include choices on broad-based aggregates, the size of
the public sector, defi cits and debt, all of which are infl uenced by economic trends and
external constraints. They represent more centralized, top-down processes and decisions
made by high level offi cials. Microbudgetary decisions include lower level choices
on programs, ministry budgets, infl uenced by specialized interests and constituencies.
Decision-making tends to be more fragmented and decentralized, more bottom-up, focusing
on middle- and lower-level offi cials and legislators. [LeLoup, Ferfi la, and Herzog
(1999) p. 216]
There may, of course, be confl ict between the two levels such as the need to constrain
government expenditures to reduce infl ationary pressures and while at the same time
respond to the demand for more expenditures on education to increase the supply of
skilled labour. Such confl icts are inherent in the budgetary process but how they are

played out will refl ect not only the political orientation and management strategy of the
government but also the pressures from external actors such as the European Union,
the International Monetary Fund, the World Bank, the World Trade Organization and
other international fi nancial and trade institutions and agreements. Furthermore, macroeconomic
budgeting is made more complex because the other major macroeconomic
lever, monetary policy, is controlled by the central bank and not the government. Central
bankers are notoriously conservative and prone to focus on one primary goal, that of
price stability, to the exclusion of other macroeconomic objectives such as has been the
case with the European Central Bank=s defence of high interest rates at the expense of
unemployment.
FISCAL POLICY AND BUDGET PRIORITIES IN THE TRANSITION
As we have pointed out previously, the political imperative driving Slovene politics
since the eighties has been entry into the European Union. This has meant pressure to
tailor the size and composition of state expenditures to conform to the Maastricht criteria
and to the other acquis laid out by the EU as conditions of entry into the union. Two of
the Maastricht criteria bear directly on the budgetary process B the limit on the public
debt to GDP ratio, and the limit on the size of government defi cits to a maximum of three
per cent of GDP. 1 However, Slovenia has had little diffi culty in meeting these criteria.
The public debt has remained at around a quarter of the GDP, well below the Maastricht
limit, and government defi cits have generally been minimal although in 2002, the defi cit
did approach the 3 per cent ceiling. Indeed, preoccupation with balancing the budget has
been a feature of the Slovenian budgetary process since independence such that, if after
presenting the fi rst draft of a balanced budget, any increased allocations to one program
or another must be offset by reduced allocations to other departments or programs.
This insistence on a balanced budget created a serious fi scal problem in 1998 when,
despite government opposition, Parliament used its legislative power to increase
spending on children=s and family benefi ts with profound budgetary implications. The
government was forced to make severe cutbacks in allocations to other departments
and programs to maintain the macroeconomic budgetary balance. This preoccupation
with budgetary balance and a reduced role of the state refl ects the neoliberal thrust in
European macroeconomic regulation which has largely eliminated Keynesian economics
from the region=s economic policy agenda. 2
Neoliberal ideology has also been the dominant infl uence in the acquis and other EU
diktats that have been more problematic in the harmonization of Slovenia=s fi scal and
budgetary policy with that of the EU. These include everything from the reduction in the
1 It is interesting to note that several existing (2003) members of the EU, in particular Germany
and France, have recently been unable, or unwilling, to conform to the Maastricht standards limiting
the size of budget defi cits because of recessionary economies and unemployment. In the case of
some other members, the criterion on debt/GDP ratio was ignored or creative accounting was used
to bring the countries into compliance at the time of entry into the European Currency Union.
2 An example, though it affects fi scal policy only indirectly, is the requirement that the Bank of
Slovenia be prohibited from direct lending to the public sector and that the Bank be given legislative
independence from the government, thus limiting the ability of the government to facilitate
co-ordination of fi scal with monetary policy. See also Palley (2004).
663

size of government, more privatization, a more restrictive pension system, regulation of
support to agriculture, and the structure and level of taxation. 3 Perhaps the taxation issue
is the best, and most direct, example. In 1999 a Value Added Tax (VAT) was introduced
to conform to EU practice and new excise taxes on alcohol required by the EU were introduced
while duty free shops on Slovenia=s borders were eliminated by 2001. As a 2002
report issued by Europe=s right-of-centre parties notes, for instance, Athe excise duty on
ethyl alcohol was increased by 24% in February 2001 and it thus reached the EC minimum
excise duty rate.@ [Group of the European People=s Party and European Democrats (2002)
p. 58. (emphasis added.)] This refl ects the general neoliberal agenda to shift the burden
of taxation from direct (income and payroll taxes} to indirect (sales and excise) taxes. The
magnitude of the move has been considerable. In 1992, sales taxes accounted for 45.6 per
cent of government revenues. By 1999 this had risen to 61.5 per cent. This shift to taxes
on consumption is, of course, regressive and serves to exacerbate income differentials
rather than narrow them with the heaviest burden of taxes falling on the middle and
lower strata of Slovenian society.
This neoliberal direction of Slovenian budgetary policy is to some extent in confl ict
with the socialist and egalitarian sentiments which not only were manifest in the post-
Second World War period, but also dating back to the Christian Socialist doctrines of the
earlier period. As LeLoup, Ferfi la and Herzog note, Athe movement toward a free market
economy has not removed the traditional leftwing tendencies of much of the population.
Citizens expect services from government, particularly social services, pensions, health
care, and family services.@ [LeLoup, Ferfi la and Herzog, (1999) p. 220] The legacy of four
decades of socialist government, thus, was a well developed welfare system though, as we
have pointed out, one that operated through self-management agreements and interest
unions rather than formally by the state.
This, in itself, did not pose a problem for Slovenia=s entry into Europe. Most of continental
Europe had fairly comprehensive welfare states, particularly the Scandinavian
members of the EU and also Germany and Austria which have been the models for
Slovenia=s >social market economy.= Government expenditures as a percentage of Gross
Domestic Product in Slovenia by 2000 was below the EU average and well below those
of its major European trading partners Germany, France, Italy and Austria. (See Table
8.1). It is only marginally higher than the OECD average which is held down by the weak
welfare states in the US, Japan, Britain, Canada and Australia. The Slovenian level is
also signifi cantly lower than many of the other central European transition states such
as Hungary, Poland and the Czech and Slovak Republics. [LeLoup, Ferfi la and Herzog
(1999) p. 217]
In short, it was not the size of the state that represented an impediment to EU entry
but rather the composition of expenditures and the revenue sources to fund this level of
expenditure. A particular problem was the size of pension payments which accounted
for over twelve per cent of GDP in 1995. This was also perceived as a growing problem as
the population aged and more and more people retired from the labour force, a problem
that is being faced by most countries with >pay-as-you-go= social security schemes including
the United States. The problem was partially addressed in January 2000 with the
implementation of the Law on Pension and Disability
3 For a fuller discussion of all of the constraints imposed by the EU on Slovenian fi scal and budgetary
policies, see Group of the European People=s Party and European Democrats (2002) Slovenia’s
Accession to the EU, part II: 2001 Regular Report.
664

Table 8.1
Government Expenditures as Percentage of GDP (OECD projections, 2000)
Country Government Expenditure as % of GDP
2000
Slovenia* 42.2
Austria 49.0
France 53.6
Germany 46.8
Italy 48.5
EU 47.2
OECD 39.5
US 32.3
Great Britain 41.1
Canada 41.5
Japan
Source: OECD, Economic Outlook, Sept. 2003;
39.8
*for Slovenia, Bank of Slovenia, Monthly Bulletin, September 1993.
Insurance which increased the age at which people became eligible for retirement
pensions and introduced partial funding and voluntary individual savings plans. Public
expenditures on pensions have shown a slight downward trend since the new law came
into effect. (See Table 8.2) The other major problem related to the revenue side of the social
security system which was funded primarily through payroll taxes or contributions.
Writing about1997 revenues, Ferfi la notes:
The contributions to pension and disability insurance represented 24.35% of the
average gross wage per employee in Slovenia. Together with contributions for health
insurance, unemployment and maternity leave, they accounted for 38% of the gross
wage in 1997, of which 22.1% were covered by employees and 15.9 % by employers.
... [The] high share of social security contributions should be mentioned, accounting
for 15.6% of GDP. This is one of the greatest deviations from the world trends. It can
be described as a kind of obstacle to economic development and in particular the
competitive position of Slovenian enterprises on domestic and foreign markets. On
the other hand, its positive contribution to a high level of social security should not
be ignored, meaning also higher standard of living, less criminal and more pleasant
rhythm of life of Slovenes compared to the developed countries. [Ferfi la (2000) pp.
41, 44]
However, as Table 2 shows, the shift in taxation to sales taxes and reforms to the pension
system has signifi cantly reduced the share of GDP going directly to social security
contributions.
Table 8.2
Pension Payments and Social Security Contributions as a Per Cent of GDP
Year Pension Payments as % of GDP Social Security Contributions as % of GDP
1995 12.3 16.3
1999 12.1 13.6
2000 11.6 13.1
2002 11.4 12.9
Source: Authors' calculations based on data from the Bank of Slovenia, Monthly Bulletin, various issues.
665

666
CONSTRAINTS ON BUDGETARY CONTROL
A major constraint on budgetary control of expenditures is the fact that Slovenia does
not have a unifi ed budget. The budget excludes the pension system, health insurance,
local government expenditures, and some smaller special funds which are provided for
by legislation which establishes their own dedicated sources of income and expenditure
entitlements . In the case of pensions, the central government budget only provides for
any expected defi cits when the contributions fall short of pension payments in any year.
However, the pension system expends two thirds as much as the main government budget.
Expenditures by the health insurance system are a third as large as the central budget.
(See Table 8.3) However, capital expenditures for the health care system are provided for
in the central budget.
What Table 8.3 shows is how little structural change has taken in the distribution of
government expenditures during the transition period. What it also indicates is how little
discretionary room the central government has in its budget allocations, particularly
after subtracting the largely non-discretionary expenditures on education. Indeed, the
largest allocation of the budget is for wages and salaries of public sector workers which
has absorbed an increased share of government spending, around a third in the late nineties.
One estimate puts almost 85 per cent of government spending beyond discretionary
control as either legally mandated or as earned entitlements. [European Commission,
(April 2002) p. 123]
Table 8.3
The Structure of Government Expenditures:
Percentages of Total Government Expenditures
Year Total Gov't Central Gov't Local Gov't Pension & Obligatory
Expenditure Expenditure Expenditure Disability Health
Fund Insurance Fund
1992 100.0 45.4 10.8 27.4 15.6
1995 100.0 45.1 10.1 29.8 15.1
1998* 100.0 45.1 10.3 30.0 14.7
* 11 Months, January-November
Source: LaLoupe, Ferfi la and Herzog, ABudgeting in Slovenia During the Democratic Transition,@ pp.226-227.
To the extent that the government can only directly control less than half of budgetary
spending, its leverage in using fi scal policy to achieve macroeconomic and microeconomic
goals is highly constrained. However, political forces within post-independence
Slovenia have also served to constrain change in the structure and size of budgets. This
is the result of two circumstances: the fi rst, the tradition of consensus building which
promotes negotiations between those departments and interests who would wish to
claim more state resources or reduce the role of the state, and the conservers who would
maintain the status quo; and the second, the persistence of coalition governments, often
made up of very diverse parties. The challenge to successive fi nance ministers has been
to reach a consensus acceptable to all the coalition parties, a challenge that largely precluded
any extensive cutbacks in government spending.

THE EXTERNAL CLIMATE
Given Slovenia=s political preoccupation with entry into Europe, it has felt the pressures
to conform to budgetary norms set out by the EU acquis and IMF and OECD guidelines.
That being said, however, because Slovenia did not have signifi cant external debts,
balance of payments problems, public debts or government defi cits, the country had
much greater latitude to be selective in the pace and composition of fi scal change. Fortunately,
it escaped the need to conform to the contractionary fi scal policies and programs
of the IMF. Still, IMF and OECD guidelines, and more particularly, European Union accession
guidelines, have been instrumental in reforms in the budgetary system and process.
[LaLoup, Ferfi la and Herzog (1999) p. 235. One major change adopted in 2001-2002
was the move to multi-year budgeting. Changes in budget procedures would also prohibit
legislative changes in government expenditures within any given budget year requiring
such changes to be incorporated in the following year=s budget. Another change involved
legislation and a social agreement on public sector wages in 2003 which separated and
limited public sector wage increases relative to the market sector.
Despite the relative independence Slovenian MPs have claimed from the dictates of
external bodies, these same legislators feel that the EU infl uence is rapidly increasing and
will further escalate.[LaLoup, Ferfi la and Herzog (1999) p. 235] This is almost inevitably
so once Slovenia enters the EU and, after 2007, the European Currency Union at which
time it will also lose its ability to run an independent monetary and exchange rate policy
at a time when its fi scal policy will be tightly constrained by European Union policies
and agreements. Macroeconomic budgeting will be almost completely constrained and,
given entitlements and legislatively fi xed expenditures, microeconomic budgeting will be
limited to marginal adjustments unless the legislature is willing to conduct a wholesale
attack on the welfare state. Such an attack would almost inevitably result in political
and class confl ict given the history of Slovenia over the past century. Perhaps the greatest
immediate threat to Slovenia=s sovereignty in microbudgeting, however, is her recent
membership in NATO which has brought enormous pressure by the military alliance to
increase the country=s military expenditures. Any signifi cant increase, given the commitment
to balancing the budget and limiting the growth in the size of the state, would entail
a major reallocation within budget allocations. As such, it would force a realignment of
political priorities and a shift in social values.
FISCAL POLICY AND BUDGETING SINCE INDEPENDENCE
The dominant ideology directing all policy in Slovenia since 1991 has been convergence
with Europe. Given the relatively advanced stage of the market economy and
the sound basis of public fi nance that marked the republic at the time of independence,
Slovenia=s fi scal and budgetary adjustments to western European norms were
much less than those, not only in the etatist states of eastern Europe, but also in the
less economically developed republics of the former Yugoslavia. This provided a more
stable base for the transition from a welfare system based on social agreements and dispersed
self-management to a state-based system and for a major change in the sources
of government revenues. In fact, the transition from diversifi ed budgeting to a central
system occurred without major disruption even though a fully unifi ed budget is still not
667

in effect and the central budget controls less than half of state expenditure in Slovenia
to this day.
Pressures from international economic agencies and guidelines from the EU itself
have led to changes in budgeting including the shift from direct to indirect (VAT) taxation,
adopting functional budget categories, multi-year budgets and other adjustments to
the budgeting model, but these have not encompassed signifi cant structural change in
state expenditures or major shifts in fi scal policy. In part this refl ects the political system
which has resulted in the domination of broad based coalition governments where compromise
and consensus have favoured the guardians of the status quo over those who
would change the role and size of the state apparatus. In part, it also refl ects the continuance
of a socialist political culture which deems the welfare of the common people to be
the responsibility of the state. As a result, protection of social welfare and the provision
of social programs has remained a central element in the role of the state. It is these expectations
that drive government expenditures almost half of which are mandated by law
or legislated entitlements and are determined independent of the budget process.
Perhaps of greatest signifi cant, the most important aspect of the budget in Slovenia=s
quest for European Union membership is the macroeconomic impact. From this viewpoint,
the budget is seen more as a technical rather than a political document. The prime
objective, supported by a strong political consensus, therefore, has become balancing
the budget and avoiding defi cits as required by the Maastricht criteria. Within this constraint,
the potential for microbudgeting was still considerable and when necessary, as
when the legislature increased expenditures on family and child welfare, government
expenditure reallocation has proved quite fl exible. However, given the level of entitlements
and legislated expenditures, there does not appear to be great scope for a major
functional change in budget priorities unless there were a profound shift in the ideological
foundation of Slovenian political culture.
In the longer run, it would seem that Slovenia may not have much control over its fi scal
and monetary policies in the future, particularly once the country enters the ECU in
2007. As one of the smallest countries in the whole of Europe, monetary and fi scal policy
will be dictated essentially by Brussels and the European Central Bank. As some senior
Slovenian government offi cials have noted,
668
the EU and European Commission are very bureaucratic and complicated, used
to dealing with countries much larger than Slovenia. As a result, on several matters,
offi cials report lobbying for more fl exible and innovative approaches to EU rules and
>negotiating and educating= EU offi cials about their situation. In noting his nation=s
reluctance to deal with a set of externally imposed bureaucratic rules, the Finance
Minister noted, Awe already went through it once as part of Yugoslavia, we do not want
to go through it again with the EU.@ LaLoup, Ferfi la and Herzog (1999) p. 235.
The Finance Minister=s desires, however, are unlikely to be fulfi lled given the peripheral
size and importance of Slovenia in a >greater Europe.=

CHAPTER 9
SLOVENIA AND THE EU: THE ACCESSION
In the long run, a universal association of free peoples was the ultimate aim of all
free men. But before they could become members of this great association it was essential
that they should each have a separate existence. Every people was therefore bound
to constitute itself a nation before it could concern itself with the great questions
of humanity as a whole. [Guiseppe Mazzini, paraphrased by Fred G. Stambrook, European
Nationalism in the Nineteenth Century (Melbourne: Cheshire, 1969, p. 29)]
The announcement of the admission of ten applicants to the European Union, including
Slovenia, in May 2004 completed a rather interesting circle. The Slovenes, a part of
larger European entities for most of their history, fi nally achieved the status of nation state
in 1991. Yet now, just over a decade later, Slovenia was to enter a new economic organization
of states that once again reduced its economic status to that of a province within
a larger political-economic federation. In short, Slovenia had come full circle, trading its
status of a republic of the Socialist federation of Yugoslavia, fi rst for independence, then
for becoming a republic in the Capitalist federation of European States, formally known
as the European Union. When further accession to the European Monetary Union (EMU)
occurs in 2007, Slovenia will effectively lose control over its monetary policy in addition to
its fi scal policy which is tightly constrained by the EU’s growth and stabilization pact. The
purpose of this chapter is to assess both the process of accession and the costs and benefi ts
of EMU membership.
SLOVENIA AND THE PROCESS OF EU ACCESSION
The desire for Slovenian EU membership B or at least incorporation into the western
European economy B goes back to the early years of the 2nd Yugoslavia, if the economic
historians are to be believed. As we have pointed out previously, however, the drive for
membership really took off in the 1980s as a result of the economic and political crisis that
had engulfed Yugoslavia. The conditions for entry, however, were perhaps more severe and
more ideologically and policy restrictive than most Slovenians are aware though there is
little indication that any serious evaluation of the costs and benefi ts of membership was
undertaken before or during the campaign for entry in the Union. Membership in the EU
and the EMU will, economically, reduce Slovenia’s sovereignty, in effect making it a small
province of a very much larger European economic unit committed to neoliberal economic
values and institutions. The Bank of Slovenia will become at best an administrative unit of
the European Central Bank (ECB) and the Government of Slovenia will become effectively
an administrative, »provincial« govern ment within the larger European context. Before discussing
the impact of EU and EMU membership, however, we should be familiar with the
history and process involved in the EU expansion in 2004.
The enlargement of the EU, which culminated in the accession of the ten applicant
countries in 2004, marked the end process of events that began with the fall of the Berlin
Wall in 1989. The European Economic Community at the time moved quickly to incorporate
central and eastern European countries into the western European sphere of eco-
669

nomic infl uence by extending diplomatic and trade and co-operation agreements to ten
central European countries, including Slovenia after 1991. The Community also established
funds under a number of programs to assist in the transition of these countries to capitalist
market economies. Moreover, the explicit conditionality for any political or economic
rapprochement was harmonization of their economic policies and institutions with those
of the EC.
Slovenia’s fi rst step in establishing institutional and enhanced trade relationships
with the EC came in April 1993 when the Co-operative Agreement between the European
Community and the Republic of Slovenia was concluded. This agreement replaced the
trade and co-operative agreements negotiated with Yugoslavia in the 1980s. In addition
to the Co-operative Agreement, other agreements on political dialogue, fi nancial protocols
and transportation were also implemented. This set the stage for further negotiations
towards integration.
The next major step in the process was the conclusion of Europe (Accession) Agreements
during the 1990s which, according to the European Commission, were designed to
gradually establish free trade between the EU and the associated countries and to monitor
and direct the process by which the associated countries would adapt their political
and economic institutions to the norms required for accession to the European Union (as
the European Community was renamed in 1993). [European Commission, Enlargement
(nd) p. 33] Slovenia entered into negotiations for such an agreement in March 1995 and
these were concluded two months later. However, it was another year, June 1996, before
the Europe Agreement was signed and almost four years, February 1999, before it came
into effect. [ Fink Hafner and Lajh (2003) p. 76] However, immediately upon the signing
of the Agreement, Slovenia applied for EU membership.
The real start of the movement toward accession for all of the 10 countries scheduled
for membership beginning May 2004 began with the Copenhagen European Council
meeting in June 1993 which formally agreed to the enlargement of the European Union
(EU) for those central and eastern European countries that applied and met certain criteria.
In other words, the issue of enlargement became an question of »when,« not »if.« The
three overriding criteria of accession adopted at Copenhagen were:
• stability of institutions guaranteeing democracy, the rule of law, human rights and
respect for and protection of minorities;
• the existence of a functioning market economy as well as the capacity to cope with
competitive pressure and market forces within the Union;
• the ability to take on the obligations of membership including ad herence to the
aims of political, economic and monetary union. [European Commission, Enlargement
(nd) p. 7]
In December of the following year at Essen, the European Council further developed
the process when it agreed to a pre-accession strategy that involved establishing partnerships
with applicant countries and supplying material and technical assistance to help
them on an individual, country by country basis in adjusting to the rules and institutions
of the EU. At this point one of the roadblocks to accession of the CEEC countries
arose with the entry of Austria, Finland and Sweden to the EU. The issue of concern was
amendments to the governing structure of the EU which was becoming too unwieldy
and politically unbalanced. This would become critical with the accession of a signifi -
cant number of new, and mostly small, countries. The issue was joined at the Madrid
meetings of the European Council in December,1995 when the Council established the
670

Inter-Governmental Council (IGC) which began work in March, 1996 to develop a new
structure for governing the EU. Accession negotiations for applicant countries were to
begin six months after the end of the IGC. However, resolution of the issues involved
in changes to the governing structure of the EU did not come easily. Nevertheless, the
Madrid meetings did provide for the harmonization of national legislation and administrative
and judicial structures with those of the EU and established harmonization as a
prerequisite of accession.
Despite the failure to conclude agreement on major changes in the governing structure
of the EU, the ICG did report in1997 and some changes were adopted in the Amsterdam
Treaty to come into effect May, 1999. The Amsterdam Treaty also involved the incorporation
of a common social charter and the harmonization of fi scal and employment policy
which also became a condition of entry into the EU for the applicant countries. In any case,
the European Council, meeting in Luxembourg in December, 1997, agreed to begin negotiations,
initially with six of the applicant countries, including Slovenia, on entry into the
EU involving an enhanced accession strategy (Agenda 2000) utilizing both individual and
broadly collective mechanisms. Though each individual country was required to develop
and implement a pre-accession strategy which was individually monitored, a multilateral
structure was also employed with the establishment of annual European Conferences involving
all the applicant countries, the ten central European countries plus Cyprus, Malta
and Turkey. The Conference fi rst met in London in March of 1998 and met annually thereafter.
In February, 1999 at Helsinki the European Council also added a further requirement
for those countries seeking entry, that they »must share the values and objectives of the
European Union as set out in [all] the treaties« [ European Commission, Enlargement (nd)
p. 10] including settling all outstanding border disputes and increasing provisions for nuclear
safety.
The fi nal stage in the enlargement process began with the opening up of formal accession
negotiations with the initial six countries (Czech Republic, Estonia, Hungary,
Poland, Cyprus and Slovenia) in March, 1998, though this was expanded in 2000 to also
include Bulgaria, Latvia, Lithuania, Malta, Romania and the Slovakia. Beginning in November
1998, annual reports were prepared assessing the progress that each country had
made toward meeting the accession criteria. Finally, in October 2002, the provisional list
of the ten countries expected to enter the EU was released. These included Czech Republic,
Estonia, Hungary, Poland, Cyprus , Latvia, Lithuania, Malta, Slovakia and, of course,
Slovenia the most economically developed of the applicant countries.
SLOVENIA AND THE ACCESSION CRITERIA
The accession criteria, outlined originally in the 1993 Copenhagen agreement and
subsequently enhanced and redefi ned by various agreements can be summarized as follows.
The basic requirement requires adherence to all the basic principles of the original
Treaty of Rome creating the European Economic Community as expanded by the Maastricht
and Amsterdam treaties’ provisions providing a common macroeconomic policy
framework. At the microeconomic level, the EU provisions for sector by sector acquiescence
to common (capitalist) standards, known as the Acquis communautaire, were also
mandatory. The European Commission defi nes these Acquis as:
671

672
the entire body of European Community legislation that has accumulated, and
been revised, over the last 40 years. It includes the founding Treaty of Rome as revised
by the Single Act and the Maastricht and Amsterdam Treaties; all the regulations and
directives passed by the Council of Ministers; and the judgements of the European
Court of Justice. [European Commission, Enlargement (nd) p. 32]
Thus, being accepted into the EU involved an equivalent acceptance of the rules and
procedures of the larger EU entity without any commensurate infl uence on economic
power, particularly on monetary policy where the European Central Bank has, since the
introduction of the Euro in 2002, operated in a manner totally independent of advice
from national governments within the union.
For Slovenia, the ideal of accession, as we have noted, had been a central feature of
economic policy for many years. Right from the beginning, the new state modelled its institutions
on those of western Europe. Even its adoption of the Austrian-German institution
of co-determination in labour relations can be seen as an attempt to adapt Slovenian
institutions of worker self-management to the capitalist market model. In any case, as we
have noted, Slovenia early on B long before its application for EU membership B began
preparation for EU acceptance. Of course, Slovenian entry into the EU was considered
the most probable of the CEEC nations if simply because the Slovenian economy and its
market institutions were most easily adaptable to the western European model. Nevertheless,
it was not until 1996 that Slovenia negotiated an Accession Agreement with the
EU and offi cially applied for inclusion in the economic union. The agreement, signed in
June, 1996, came into force in February, 1998.
Slovenia had, of course, been long preparing for entry into the EU. In 1996, the
same year it applied for EU membership, it released its strategy for incorporation in the
larger economic organization under the title Strategy of International Economic Relations.
The strategy document explicitly set out the measures to adjust the Slovenian
economy and its institutions to those mandated by the EU. The document supporting
its application for EU membership laid out the history of legislative amendments involving
trade, currency regulation and exchange rates, constitutional and trade laws,
customs and tariff laws, competition policy and the protection of intellectual property,
that predated Slovenia’s application. Subsequently, of course, many further amendments
were made to bring Slovenia’s legislation increasingly into conformity with the
standards established by the EU.
After Slovenia’s initial application for EU membership, the European Commission
conducted its fi rst review of the country’s ability to meet the »political«, »economic«
and »ability to assume the obligations of membership« accession criteria requirements
established at the Copenhagen European Commission meeting in May of 1994. Although
the 1997 Commission’s report was generally favourable given that Slovenia had
been consciously harmonizing its legislation with European norms, a number of problems
remained with regard to the adoption of the acquis, and with Slovenia’s administrative
and regulatory institutions to implement the measures. [Commission of the
European Communities (October 2002) pp. 18, 29, 43] With respect to the latter, the
1997 Opinion concluded:
Slovenia has to make considerable efforts to take on the acquis, particularly as regards
the effective application in the area of the internal market. In addition, important
progress will be necessary in the sector of environment, employment and social affairs

and energy. More generally, further administrative reform will be indispensable if Slovenia
is to have the structures to apply and enforce the acquis effectively. [Commission of
the European Communities (October 2002) p. 43]
Slovene authorities who proposed the 1996 agreement were well aware that entry
into the EU would greatly constrain the use of monetary policy. »When Slovenia becomes
part of the EU, the ability to pursue an independent monetary policy will disappear
and the domestic currency will be fi xed in relation to the Euro.« [Slovenia (1996)
p. 23] Slovenia was planning to tie the tolar to the Euro (i.e. join the ERM2) in late 2004
or in 2005 as soon as infl ation was reduced suffi ciently to do so. The implications of
EU membership for the welfare of the average Slovenian worker, however, were not
assessed. Nevertheless, their implications were clear and recognized by the authorities.
»The international competitiveness of exporters is primarily determined by their
unit costs of production; which are high [in Slovenia] mostly due to wages.«[ Slovenia
(1996) p. 24] The only obvious solution was, and remains, a reduction of relative wages
or an equivalent improvement in labour productivity relative to wages and to labour
productivity in other countries..
Nevertheless, Slovenia proceeded for a number of years to introduce measures to
tailor its legislation to conform to EU standards B trade law, administrative law, constitutional
law, competition law, the law on the protection of (monopoly) intellectual property
B all those laws designed to integrate Slovenia into the European capitalist economy.
The political criteria for entry into the EU were considered to have been achieved by
1997.
In its 1997 Opinion, the [European] Commission concluded that Slovenia fulfi lled
the political criteria. Since that time, the country has made considerable progress
in further consolidating and deepening the stability of its institutions guaranteeing
democracy, the rule of law, human rights and respect for and protection of minorities.
Over the past year, further efforts have been made in this direction. Slovenia continues
to fulfi l the Copenhagen political criteria. [European Commission, (2001] p. 60]
Nevertheless, there still remained a few outstanding, if generally minor, issues that
Slovenia was called upon to address before it fully complied with all the accession conditions
and the acquis.
The economic criteria established for entry into the European Union, however,
proved somewhat more diffi cult to achieve. The 2001 Commission Report, repeating its
1997 Opinion, noted that Slovenia was a functioning market economy and was close to
completing reforms increasing domestic competition and removing all restrictions on
capital movements. Furthermore, its macroeconomic performance had been favourable
with steady growth in GDP, low unemployment and a manageable and declining current
account defi cit. The main macroeconomic and structural indicators for 2000 included in
the Commission’s Slovenia Report
2001, support its conclusion that Slovenia was on path to »a relatively rapid and
steady catching up with the EU average.« [European Commission, Slovenia Report 2001
(2001) p. 24] 1
1 Selected indicators are given in table 9.1 taken from the 2001 and 2002 European Commission
Reports and more recent data from the Bank of Slovenia and the Institute of Macroeconomic
Analysis and Development (IMAD).
673

Table 9.1
Main Macroeconomic and Structural Indicators for 2000-2003
2000 2001 2002 2003 2004
Real GDP growth rate 4.8 % 3.0 2.9 2.7 4.2
Infl ation rate 8.9 % 8.6 7.5 5.6 3.6
Unemployment rate 6.9 % 5.7 6.4 6.7 6.3
General government budget balance
(% of GDP) -3.5 % -2.8 -2.7 -2.8 -2.3
Current account balance
(% of GDP) -3.3 % -1.7 1.5 -0.3 -2.0
Foreign debt to export ratio 74.8 % 85.7 99.5 98.9 92.8
Foreign direct investment
(% of GDP) 1.0 % 1.9 0.7 0.9 0.9
Population (000s) 1,900 1,992 1,996 1,997 1,997
GDP per head (PPS Euros) 16,100 16,000 16,500 17,900 18,900
Per cent of EU Average 73.7 % 74.2 74.9 76.3 79.5
Share of Agriculture
Gross value added* 3.2 % 3.1 3.1 2.5 2.7
Employment** 9.8 % 10.2 9.1 8.3 9.9
Investment/GDP ratio 26.7 % 23.9 23.8 25.3 26.6
Foreign debt/GDP ratio 48.2 % 49.4 57.2 55.9 55.6
Exports/GDP ratio 56.1 % 57.6 57.6 56.5 59.9
Foreign direct investment
Total Stock (million Euros) 2,676 3,041 3,923 5,131 5,557
Per capita (Euros per capita) 1,348 1,527 1,965 2,569 2,783
*Agricultural, Hunting and Fishing
** By Labour Force Survey
Source: 2000-2001, European Commission, Slovenia Report 2001 (2001), pp. 23-24; 2002 (2002) pp. 30, 32; 2002-
2003; IMAD, Spring Report 2005; IMAD, Slovenian Economic Mirror, selected issues; Bank of Slovenia, Monthly Bulletin,
selected issues; author’s calculations. Note that there are some signifi cant differences between the European Commission
fi gures and for comparable IMAD and BofS fi gures for 2000-2001.
674
Furthermore, the 2001 Commission reports:
Since the last Regular Report, Slovenia has made good overall progress in transposition
and implementation of the acquis. It has made signifi cant progress in the area
of company law, agriculture, transport, energy, culture and audio visual and telecommunications.
However, only limited progress has been made in other areas, notably
on regional policy, free movement of persons, social policy and employment and consumer
and health protection. It has continued to strengthen the administrative capacity,
especially in the areas of free movement of goods, telecommunications, culture
and audio-visual, and internal fi nancial control.[ European Commission, Enlargement
Strategy Paper 2001 (2001) p. 61]
However, there are other aspects of the economic performance that the Commission
found unacceptable. The most prominent
was the level of infl ation where the current rate was more than double the Maastricht
requirement (within one and a half per cent of the average of the 3 lowest EU members).
As a result of the high infl ation rate, at least high with respect to Maastricht, Slovenia’s
long term interest rates (nominal rates of around 16-17% in 2001) were also well above
acceptable rates though nominal rates fell by about 1 % in 2002 and more rapidly to 12.6
% in 2003. [Bank of Slovenia (December 2003-January 2004) p. 22] At the same time the

Bank of Slovenia after November 2001, though still utilizing monetary growth targets,
began explicitly targetting infl ation with a medium-term infl ation target of 3-4 %.
The exchange rate, while stable in real terms, had been falling steadily in nominal
terms in the last half decade by between six and ten per cent. The Commission linked
the persistence of infl ation »to widespread indexation in the Slovene economy and to
the monetary and exchange rate policy framework...« and to labour markets that, in the
Commission’s opinion »are not suffi ciently fl exible.« [European Commission, Slovenia
Report 2001 (2001) p. 32] Furthermore, the Commission report called for more privatization,
particularly in the banking and insurance sectors, and less state involvement in the
economy which, it argued (with no supporting evidence), »would help to attract more foreign
investors and provide a better microeconomic basis for a sustained growth performance
in the medium term« which, in turn, would »free up monetary and exchange policy
to focus on price stability instead of maintaining external competitiveness.« [European
Commission, Slovenia Report 2001 (2001) p. 32]
Many of these critiques also found their way into the 2002 annual report of the Commission.
Infl ation led the list which the report blamed on »public sector wage pressures
... sustained by still prevalent although weakening indexation and a largely accommodating
monetary and exchange-rate policy.» [Commission of the European Communities
(October 2002) p. 29] In November 2003, the Bank of Slovenia and the government did
release a comprehensive program designed to reduce the rate of infl ation in order to allow
the country to enter the European monetary system and ultimately adopt the Euro.
The program called for tax policies, controls on administrated prices, a policy of lowering
interest rates and further de-indexing prices and payments, and structural changes that
would reduce the structural budget defi cit and increase competition in markets. The effectiveness
of this package of measures has yet to be seen. At the same time, the social
partners did agree in the 2004-2005 Social Agreement to wage increases that in real terms
would be 1 per cent below the average growth in productivity and would maintain public
sector wage growth rates below those in the private sector. The agreement of July 2003
also provided for a wage adjustment formula based on domestic consumer price infl ation
(excluding tobacco and alcohol), the projected rate of infl ation in the EU, and the rise in
the value of the Euro. The expected real wage growth in 2004 was projected at 2.2 per
cent for the private sector, 0.8 per cent for public employees. For 2005, the projections are
2.2 per cent and 1.2 per cent respectively. These measures were intended to reduce both
cost-push infl ation (wages below productivity growth) and demand-pull infl ation (public
employee wages below private sector wages.)
The Commission’s report also censored Slovenia for its slowness in completing the
privatization process, in particular of the insurance and banking sector to which the report
attributes the weak infl ow of foreign direct investment (FDI).
Slovenia has received only relatively marginal infl ows of foreign direct investment at
about 1 % of GDP annually, but encouragingly, in 2001 infl ows more than doubled with
2.3% of GDP, mainly as a result of foreign acquisitions in the banking and telecommunication
sectors.[Commission of the European Communities (October 2002) p. 31]
In fact, however, it had been the very policies that the Commission criticizes that allowed
Slovenia to recover so quickly from the depression of the early 1990s and pursue its
successful macroeconomic expansion without social discord, exploding income differentials,
widespread unemployment and the economic collapse that bedevilled so many of the
675

other transitional economies which implemented rapid and radical neoliberal AWashington
consensus@ policies espoused by the European Commission. These are also the same
policies that have recently come under attack even from mainstream economists such as
Nobel laureate, Joseph Stiglitz. This, then, was the dilemma facing Slovenia B give up its
unique, and successful, transitional economic policies in order to conform to the accession
criteria of the EU and risk economic stagnation and increased inequality; or risk not being
allowed entry into the EU and, ultimately, the EMU as a full member.
The preoccupation of the Commission and the OECD with promoting FDI refl ects
the increasingly neoliberal orientation of the EU and international economic institutions,
an orientation not entirely shared by the Slovenian government, business or the general
public. As we have demonstrated, Slovenia did not need foreign investment to make a satisfactory
and rapid transition to a growing, capitalist market economy. Economic, wage
and productivity growth rates have generally been above the European average while
unemployment had fallen below the European average. Nevertheless, the socially cohesive
path taken for privatisation, the adoption of a solidaristic incomes policy through
involvement with labour and a social partnership (a policy that the OECD claimed inhibited
labour market fl exibility), and a slow and partial deregulation of markets was cited
by the OECD as inhibiting the infl ow of FDI. [OECD (2002) pp.25-26]. 2
The OECD report did, however, point to the real determinants governing the infl ow of
foreign investment into Slovenia in the period since independence. The main attraction,
it concluded:
676
... indicate that most FDI in Slovenia is of the factor cost advantage seeking type.
As far as the role of labour is concerned, it is clear that it is not the low cost but rather
the quality of labour that motivates foreign investors in the case of Slovenia. [OECD
(2002) p. 13]
Nevertheless, much of the infl ow of FDI that did occur came from neighbouring Austria
(66.3 % between 1994 and 2000) and/or involved expansion and reinvestment of
profi ts from existing investments, or co-ventures with Slovenian partners, in enterprises
designed to serve European markets. Foreign fi rms in Slovenia export a much higher
proportion of their production than do domestic fi rms. This is particularly marked in
manufacturing where exports comprised almost 70 per cent of sales of FDI fi rms in1999
compared with just 48 per cent for domestic enterprises. [OECD (2002) p. 18]
The small size of the Slovenian market and the limited potential of the former Yugoslavian
market acts as a deterrent to investment in fi rms serving domestic or regional
markets. However, as the report notes, Awith accession into the EU the problem of Slovenia’s
small local market as the most important constraint for more FDI infl ows will also
cease to exist.@ [OECD (2002) p.27] Targets for foreign takeovers will be utilities and
the fi nancial sector, a major goal of international fi nancial capital in this era of imperial
economic integration.
2 The preoccupation of the OECD with promoting its version of > labour market fl exibility= is
well known despite the fact that numerous economic studies have shown that the main source of
slow economic and productivity growth in Europe has been restrictive neoliberal monetary and
fi scal policies and not labour market regulation. See chapter 6. In any case, more recently the
OECD has backed off its assertion of a close relationship between labour market regulation and
unemployment.

AGRICULTURE AND THE EU
Adapting the agricultural sector to meet minimum European standards was one of
the more onerous tasks facing Slovenia in its decade-long campaign to gain membership
in the Union. This was the case not only because the structure of Slovenian agriculture
was deemed non-competitive with European agriculture and was maintained viable only
through high levels of protection but also because European agriculture itself was highly
regulated and subsidized. It was also the most complicated sector to harmonize with EU
legislation since fully 40 per cent of the total number of the acquis applied to agriculture
[Slovenian Economic Mirror (January 2003)] and one third of the EU budget was devoted
to expenditures under the Common Agricultural Program (CAP). This fi gure was
expected to rise with the accession of the applicant countries including Slovenia given
their relatively higher dependence on small scale agriculture. Furthermore, the EU policy
of Social Cohesion called for the transfer of resources to the poorer regions of the EU,
primarily agricultural regions, in programs of rural development. 3
The structure of Slovenian agriculture was deemed unfavourable because it was
dominated by small private farms with a high proportion of part-time farmers, many of
which were farming on relatively poor land. Sixty per cent of the farmland by 2003 was
not suitable for growing crops but and was restricted to permanent grasslands While
the importance of agriculture was declining slowly during the 1990s as the government
implemented domestic programs to restructure the sector, in the later years with fi nancial
support from the EU, agriculture still represented around three per cent of GDP at
the end of the decade, down a third since independence. More importantly, agriculture
represented almost ten per cent of employment while almost half the population of the
country lived in rural communities or areas.
A survey in June of 2003 reported the total number of holdings at 77, 145, a 10.8 per cent
drop since 2000, though land use fell only by 1.1 per cent indicating a rise in average farm
size by almost ten per cent to 6.2 hectares. [Slovenian Economic Mirror (October 2003)]
However, this compared unfavourably with the average size of European Union farm which
stood at almost 19 hectares in 2000 (31 hectares if Greece, Portugal and Italy are excluded)
or to neighbouring Austria which has terrain similar to Slovenia’s where the average was
17 hectares. The main reason for the low average in Slovenia was the number of very small
farms of less than fi ve hectares though this number began dropping rapidly, particularly in
the less than two hectare category, in the years leading up to accession.
Though the average size of farms and the number of large holdings greater than 30
hectares (just 0.6 per cent of all Slovenian farms in 2003) were increasing, albeit slowly,
over the last decade, the structure of output remained relatively stable. In 2000, livestock
production, led by cattle, poultry, dairy products, pork and sheep meat, accounted for a
little under half of agricultural output; while crops, led by cereals, maize, potatoes, fruit
and sugar beets, accounted for the other 53 per cent. [WTO Secretariat (2002) Section 4,
p. 1] As an industry, agriculture was badly hurt by the disintegration of Yugoslavia with
the loss of its major export markets in 1992-93 but with a partial reorientation towards
3 The agricultural region of Pomurska has an average income just over half of that of the central
region of Slovenia which includes the capital, Ljubljana. Average incomes in the central region, in
fact, reached slightly above the EU average income in 2002 while the average in Pomurska were just
half. Despite this, regional disparities within Slovenia, though signifi cant, are generally less than
other EU and accession countries.
677

western Europe and the recovery of exports to former Yugoslav republics, agricultural
production recovered. By 2000, 61 per cent of Slovenia’s agricultural exports were to the
republics of the former Yugoslavia, 21 per cent to the EU. In terms of imports, however,
the situation was reversed with the EU accounting for 54 per cent, the former Yugoslav
republics just 10 per cent.
A more formidable challenge to Slovenia’s accession aspirations was harmonizing its
agricultural support policies with those of the EU’s Common Agricultural Policy which,
to make matters somewhat more complicated, were themselves changing in response to
criticism from the WTO, the Cairnes group of grain exporting countries, and, in particular,
developing countries, all of whom opposed the export subsidies offered to EU producers
which undercut world agricultural prices. CAP reforms, though somewhat marginal in
impact, were put forward in 2003 designed to reduce the export-orientation of agricultural
support policies, increase the market orientation of production, convert fi nancial support
from production related to direct payments, and limit direct payments to large producers.
Monies saved with these measures were directed at rural development primarily for environmental,
animal welfare and quality improvements.[ Slovenian Economic Mirror (June
2003)] The overall system was designed to maintain the rural population and the »rural
way of life« through guaranteeing a basic level of stable agricultural income through direct
payments and market regulation while increasing agriculture’s responsiveness to market
signals and reducing its reliance on subsidized exports.
Slovenia’s agricultural policies since independence had been directed toward harmonizing
its system with that of the EU in order to pursue its European quest. Its stated goals
included a move to a less intensive, more environmentally friendly agriculture and improving
productivity and competitiveness while retaining rural population and moving away
from its protectionist and market-price support and intervention system for maintaining
farm income. [WTO Secretariat (2002) Section 4, pp. 2-3] It began by progressively adopting
the EU system of direct fi nancial support at approximately the same level as provided
by the CAP and when formal accession negotiations began, it was already well on the way
to compliance with the EU system. The WTO Secretariat reported in 2002:
678
The instruments used for domestic support are being harmonized with those of
the EU, in preparation for accession. In the period 1991-1999, Slovenia relied mainly
on administered prices and per-hectare payments to farmers. In 1998-99, administered
prices applying to three food chains [wheat, milk, sugar] ... were phased out. Related
monopoly arrangements ... were also terminated. Slovenia moved towards the
establishment of EU-like common market organizations, in which intervention prices,
generally set at lower levels, replaced fi xed state-determined prices. To date, common
market organizations have been established for cereals, sugar, seeds of agricultural
plants, hops, fresh fruit, vegetables, olive oil, wine grapes, beef, sheep and goat meat,
and milk and dairy products.
To offset the impact of lower guarantee prices on farmers’ incomes, Slovenia has
introduced less distorting modes of support since 1995, such as direct payments and
set-aside schemes, in line with the fi rst and second reform of the CAP. This was achieved
by gradually reducing external protection and putting downward pressure on
domestic prices.[WTO Secretariat (2002) Section 4, p. 3]
Slovenia still had to negotiate the reference levels of production and quotas and the
level of fi nancial support that agriculture would receive on accession. Slovenian negotiators
fi rst presented its reference quantity and quota requests to the EU negotiators at the

end of 1999. The EU’s fi rst offer in most product classes was only about two-thirds of
Slovenia’s request. Subsequent negotiations in 2003 improved the EU offer such that it
came very close to the existing level of production in Slovenia and in a couple of cases exceeded
signifi cantly existing production levels (e.g. sugar, olive oil) and some exemptions
(derogations) were granted. [Slovenian Economic Mirror (February 2003; June 2003)] By
mid-2003 the negotiations on production quantities and quotas were closed.
This left the level of direct payments and rural development funding to be resolved.
The problem for the EU was the anticipated cost of funding CAP for the ten new applicant
countries. Particularly problematic were Poland and the poorer agricultural regions of Slovakia,
Hungary and the Baltics. Applying the same level of direct payments to these new
member countries as applied to the existing members would eat up more than half of the
total EU budget. The existing members, therefore, were unwilling to extend equal funding
to new members immediately but to phase it in over a period of ten years [Cowell (2004)].
The level of fi nancial supportwas to begin at 25 per cent of direct payments in 2004 rising
to 100 per cent in 2013. Slovenia, however, negotiated a provision that allows it to pay
supplemental direct payments to its farmers raising the support level to 85 per cent of the
EU level in 2004 and rising to 100 per cent by 2007. As the Slovenian Economic Monitor
notes, Athis is a major success of the negotiations, but a signifi cant burden on the national
budget.@ [Slovenian Economic Mirror (June 2003) This is outlined in more detail in the
following chapter.]
Rural development funding negotiations were also successful allowing Slovenia to
pursue its existing environmental and rural and village rehabilitation policy directions
with funding supplied by the EU. Of the 402 million Euros awarded Slovenia for agricultural
support for 2004-2006, two-thirds was allocated to rural development, the remainder
for market support and direct payments. [ Slovenian Economic Mirror (June 2003)]
In the accession reports in 2001 and 2002, the European Commission expressed some
concern, not with the pace and extent of the adoption of the agricultural acquis, but
rather with the progress Slovenia was making in developing the administrative capability
and in implementing effective market institutions, though progress was noted helped by
SAPARD funding and >twinning= programs with existing EU members. The last report
of the Commission prior to the fi nalization of the accession agreement at the end of 2002
concluded:
In order to complete preparations for membership, Slovenia’s efforts now need to
focus on fi nalising alignment, and further reinforcing the administrative capacity to
implement and enforce the acquis. Especially the staff of the Ministry of Agriculture,
Forestry and Food and the Agency for Agricultural Markets and Rural Development
needs to be reinforced, in particular in order to apply the Common Market Organisations
in the agricultural sector effectively and smoothly. Further efforts are to be
made as regards the coherent systematisation of procedures and drafting of manuals.
Furthermore, timely establishment of the veterinary and phytosanitary controls at the
future external borders should be ensured. [Commission of the European Communities
(2002) p. 67]
In short, policy and legislation was in place. All that remained was the fi nal development
of the bureaucratic superstructure necessary to implement and police the Common
Agricultural Policy and to integrate Slovenia’s regulatory and support system into that of
the European Union, a subject we take up in the following chapter.
679

For the most part and for most sectors, by the 2002 review, negotiations between Slovenia
and the EU had been satisfactorily concluded. Twenty six chapters had been closed
though there were still some concerns with weakness in the administrative capacity to
implement some of the acquis and dissatisfaction with the failure to reduce infl ation and
to complete the privatisation of the banking and insurance sectors. Nevertheless, Slovenia
was deemed to have met the accession requirements and negotiations with the EU
were formally concluded on 13 December 2002 in Copenhagen with entry along with the
other nine successful applicants set for May 1, 2004.
One hurdle remained. The government had promised to put the agreement to a referendum
vote to quiet fears by some that the negotiations would unacceptably compromise
Slovenia’s sovereignty, national identity and language rights. That referendum was held
March 23, 2003 and the results, published March 25 in the newspaper Delo, showed that
almost 90 per cent of those who voted, voted in favour of membership. However, only
just over 60 per cent of those eligible to vote did so. That is, only 54 per cent of eligible
voters cast ballots favouring membership in the EU though whether the low turnout refl
ected expectations by many that the outcome was a foregone conclusion or whether it
refl ected reservations about the threat of membership to Slovenian independence and
cultural identity is not known. 4
680
SLOVENIA, THE EU, THE EMU AND ECONOMIC SOVEREIGNTY
The issues involved in Slovenian membership in the EU and the EMU are encapsulised
in the opening quotation to this chapter. To become a citizen of the wider European
world, Slovenians must be prepared to give up (economic) citizenship in the nation
state of Slovenia. This is the »trilemma« proposed by Harvard economist Dani Rodrik
and implicit in the trilemma posed by trade theorists in the Mundell-Fleming model. In
the Mundell-Fleming model countries have the choice of two of three policy variables:
free international capital fl ows, a fi xed exchange rate, or a discretionary monetary policy.
Two of the three, but two only. The EU/EMU decrees free capital fl ows and a fi xed exchange
rate. This means that Slovenia would be denied any independent monetary policy
which, in the context of recent trade, infl ation and exchange rate moves could require
such a restrictive monetary policy on the part of the Bank of Slovenia that unemployment
rates would skyrocket and incomes fall signifi cantly. This was explicitly recognezed by
the Slovenian authorities in their quest to join the EMU and they began implementing
monetary, exchange rate, and fi scal policies in the »landing period« leading up to accession
to mitigate that threat. These policies are analysed in the context of the program to
enter the EMU in the following chapter.
The Rodrik trilemma paints an even less attractive scenario. This is not the place for
a detailed outline of Rodrik’s argument, but its essence is that institutions, particularly
economic institutions, are the manifestation of a society’s (country’s) values. Harmonizing
such institutions can be quite disruptive if not detrimental to economic development.
What he calls >deep economic integration= implied in the accession conditions of the
4 Referendum data from Fink-Hafner and Lajh (2003) p. 76. A companion referendum on membership
in NATO was also passed although with a lower support rate of 66.8 %. This means than
less than a majority of eligible voters, just 40.3 %, supported NATO membership. Slovenia was
formally enrolled in the military alliance on April 2, 2004 in Brussels.

EU requires an institutional change that seriously threatens the future existence of the
Slovenian nation state in functional, if not in nominal, terms. As Rodrik writes:
In sum, national borders stand in the way of deep economic integration because
they demarcate institutional boundaries. One conclusion, and the one that many economists
have drawn, is that the way forward is to offset these centrifugal forces through
international agreements, harmonization and standard setting. That, after all, is
how the economic gains form further integration can be reaped. But, as I have argued
earlier, diversity in national institutions serves a real and useful purpose. It is rooted
in national preferences, sustains social compacts, and allows developing nations to
fi nd their way out of poverty. There is no easy choice here. [Rodrik (2002) p. 12]
The dilemma (trilemma) that Rodrik proposes is that countries have a choice between
three options B the nation-state, deep economic integration, and democracy. All three
are mutually incompatible. AIf we want to maintain and deepen democracy, we have
to choose between the nation state and international economic integration. And if we
want to keep the nation state, we have to choose between democracy and international
economic integration. [Rodrik (2002) p. 13] This was the dilemma facing Slovenia as it
entered into full membership in the EU and the Euro Area.
681

682
AFTERWORD: SLOVENIA IN THE EU
Slovenia’s accession to the European Union in May of 2004 was not the end of her
quest to become a full fl edged member of the European community. There were two
further steps to be made, entry in the Eurozone, the European Economic and Monetary
Union (EMU) and full integration into the Common Agricultural Policy (CAP). Full membership
in the eurozone was to be achieved in two steps; the fi rst, entry into the Exchange
Rate Mechanism 2 (ERM2) 1 which required Slovenia to maintain for a minimum of two
years a stable exchange rate between the tolar and the Euro while, at the same time,
maintaining defi cit and debt levels within the Maastricht limits and converging infl ation
and interest rates with those required under the Maastricht treaty. The second step
was entry into the EMU which involved replacing the tolar, Slovenia’s currency since
independence, with the euro as the country’s currency. Slovenia entered the ERM2 in
June 2004, a month after entering the EU, and joined the EMU and adopted the euro in
January 2007.
The process leading up to entry into the ERM2, and of maintaining a stable exchange
rate, while simultaneously lowering infl ation and interest rates without seriously depressing
economic growth or raising unemployment, was not an easy one particularly
given the constraints on monetary, fi scal and exchange rate policy established in the
convergence requirements set out by the EU and the Maastricht Treaty.
Acquiring full benefi ts and coverage of the CAP was also a staged affair, in this case
begun unilaterally by Slovenia prior to EU accession, though in accord with a process
negotiated with the EU prior to entry into the union. Full benefi ts were also not to be
received until 2007.
SLOVENIA AND THE EMU
Generally speaking, by 2000 Slovenia was compliant with the Maastritch criteria
specifying fi scal and economic limits except for Slovenia’s continuing level of infl ation
and consequent elevated long term interest rates and depreciation of the tolar exchange
rate with the euro. Slovenian authorities were keenly aware of the diffi culty of reducing
the level of infl ation without depressing the economy and inciting domestic social unrest.
Moreover, the problem was bound to become more diffi cult as the country adopted
the EU acquis and convergence requirements limiting monetary policies and restrictions
on capital mobility, particularly after 1999 when Slovenia was obligated to abandon its
capital controls provisions which had been a pivotal element in its anti-infl ation and
exchange rate stabilization program. This was further complicated by convergence obligations
to implement signifi cant structural changes including the introduction of a value
added tax (VAT) system in 1999.
In November 2001 the central bank, the Bank of Slovenia (BS), announced its new monetary
policy designed to ready the country for entry into the ERM2 immediately upon accession
to the EU with the goal of entering the EMU at the earliest date possible, which was
two years with a stable exchange rate after joining the ERM2. Central to the bank’s policy
1 The fi rst ERM refers to the exchange rate stability requirement of the original members of the
EU leading up to the adoption of the common Euro currency and the formation of the EMU.

was lowering the rate of infl ation which in 2000 topped out at 8.9 per cent, well above the
Maastritch requirement. It was considered urgent that Slovenia reduce its infl ation rate
since, once within the EU and the ERM2 it would effectively lose its ability to use monetary
and exchange rate policies to control the macro economy. This was further constrained by
fi scal pressures induced in part by domestic wage pressures and transfer policies and by
the fi scal implications of EU convergence policies including declining customs revenues
and rising accession commitments. As Bole and Mramor conclude:
To shorten the highly risky intermediate phase of ERM2 participation, the values
of Maastricht’s criteria variables had to converge as fast as possible to the required
values while still in the landing phase [2000-2004]. If the convergence of these variables
had occurred inside the EU and ERM2, long term macroeconomic opportunity
costs would have been much larger. Namely, being in the EU and ERM2 policy makers
would have even much tighter constraints, and enforcing nominal convergence with
still present market distortions would seriously jeopardize long term performance of
the economy.
In the landing period, infl ation, fi scal stance, nominal interest rates, and exchange
rate variability had to become main objectives in the goal function of policy makers.
(Bole and Mramor, 2006, p. 106)
The problem was that, to control domestic demand pressures, high real interest rates
were required. But high interest rates relative to the prevailing rate in the Eurozone would
entice an infl ow of foreign exchange which would not only result in the appreciation of
the tolar exchange rate but also infl ate the domestic money supply, further feeding infl ation.
Moreover, high real interest rates would depress economic growth and reduce investment
required to promote the structural changes and developmental programs mandated
by the EU accession commitments such as those for agricultural and rural development
and for economic and social cohesion. The problem of rising prices was exacerbated by a
series of economic shocks in the landing period including the removal of capital controls,
the introduction of the VAT in 1999, wage pressures in the non-market sector, increases
in regulated prices, particularly in energy and oil, and the market and political power of
strategic enterprises in the non-tradable sector. (Bole and Mramor, 2006, p. 102)
The bank’s monetary policy to constrain infl ation announced in the November 2001
program was to restrict the growth in the money supply (M3) and to target interest rates,
but given the supply side nature of the price shocks, monetary policy was ill-suited to constraining
prices without, at the same time, reducing economic growth. However, other fi scal
and fi nancial tools were available, in particular the de-indexation of equity and fi nancial
claims with the application of nominal interest rates rather than real interest rates to such
claims. The relatively high nominal rates, because of the underlying rate of infl ation, would
have translated into higher real rates if sterilization required to restrict the monetization
of foreign exchange infl ows had not been carried out. The government, to contain these
pressures, switched its fi scal borrowing to domestic fi nancial markets from foreign markets
reducing the net infl ow of foreign funds and also reducing foreign government debt. The
government induced the banks and fi nancial institutions to take up the nominally-denominated
domestic government debt by offering longer term instruments better suited to the
Slovenian market. 2 By 2003, the majority of new government bonds were issued at fi xed
2 The government called outstanding indexed bonds »offering new bonds with signifi cantly
lower interest rates or cash. Banks were not prepared to shorten their longer term assets position
683

nominal rates while indexing the rest to the euro exchange rate which was expected to
converge and stabilize with entry into the ERM2. (Bole and Mramor, 2006, p. 112) It further
intensifi ed its use of foreign exchange swaps and outright purchase of foreign exchange to
prevent the tolar exchange rate from appreciating, though in the landing period the tolar
was allowed to slowly depreciate to offset Slovenia’s higher rate of infl ation.
According to Bole and Mramor, the most serious obstacles to lowering the infl ation rate
and bringing nominal interest rates into convergence with those in the euro area were fi scal
pressures and structural imbalances between the tradable and non-tradable sectors. (Bole
and Mramor, 2006, p. 115) Correcting these imbalances, they argued, was necessary before
entry into the EU and the ERM2, while Slovenia was still able to utilize relatively independent
monetary and exchange rate policies. »At the end of the landing period when the central
parity for ERM2 is determined, the room for possible adjustments to the exchange rate
would disappear and economy would be stuck with a much too high relative price level of
non-tradables for a long period.« (Bole and Mramor, 2006, p. 106)
The fi scal imbalance was evidenced by the government defi cit which, under the new
EU methodology, reached 3.5 per cent of GDP in 2000, in excess of the Maastricht limit
of 3 per cent. 3 (BS, Monetary Policy Report, 2004, pp. 43-44) Moreover, the defi cit was
subject to further projected shocks resulting from EU convergence measures, including
the decline in customs revenues and the co-payments required for EU budget funds.
(Bole and Mramor, 2006, p. 103) One particular budget shock was the agricultural support
funds which Slovenia committed to beginning in 1997 for market subsidies resembling
those of the EU budget under the Common Agricultural Policy and which rose substantially
after 2001. (Volk, Rednak and Erjavec, 2007, p. 7) Although initially fi nanced
entirely from the domestic budget, and hence a substantial shock to the Slovenian fi scal
system, the expenditure was »justifi ed in public fi nance terms as they may be considered
a kind of investment in long-term infl ows from the EU budget. (Erjavec, Rednak, Volk
and Turk (ERVT), 2003, p. 565)
The structural imbalance featured by Bole and Mramor involved that between the tradable
sector, more or less coterminous with manufacturing, and the non-tradable, market
sector, basically the rest of the market economy. With the transition to a market economy
that would happen after redeeming (called) government bonds due to an already existing oversupply
of funds (caused by capital infl ows), sterilized by short term central bank bills (with fi xed and
lower interest rates). Therefore, they were prepared to invest in new long term bonds with lower
interest rates offered by the government. Especially, knowing that the government could use its
deposit with the central bank to repay the old bonds as an alternative to selling new bonds with
inappropriate (too high) interest rates.« (Bole and Mramor, 2006, p. 112)
3 Under the IMF methodology, utilized by Slovenia up until it began the process of convergence
with the EU standards and laws, the government defi cit was 1.3 % of GDP. The difference between
the two rates is largely the result of the inclusion of losses and payments from the public funds, the
Restitution and Capital Growth (Kapitaliska druzba KAD) funds, and payments for the restoration
of private property nationalized after the war. (BS, Monetary Policy Review, 2004, pp. 43-44). The
differences are given in the following table.
Government Defi cits as Percentage of GDP: Slovenia
2000 2001 2002 2003 2004 2005 2006
GFS-IMF
methodology -1.3 -1.3 -2.9 -1.4 -1.3 -1.1 -0.8 (est.)
EU methodology -3.9 -4.3 -2.7 -2.8 -2.3 -1.8 na
Source: IMAD, Spring Report, 2007, Table 12b (GFS-IMF); ECB, Convergence Report, May 2006 (EU)
684

and increasing exposure to foreign competition, tradable goods were forced to moderate
costs and prices and increase productivity to remain competitive. The same pressures did
not exist for the non-tradable sector. As Bole and Mramor conclude:
Because of larger markup coeffi cients, even random increases in costs (supply side
shocks) resulted in much higher increases in the prices of non-tradables than in the
prices of tradables. Relative prices of non-tradables have therefore advanced predominantly
because of the fl ow of supply side shocks amplifi ed by market structure differences.
The most important supply shocks were generated by changes in regulated
prices, tax policy, and the prices of enterprises with strong market and »lobbying«
power. (Bole and Mramor, 2006) p. 100)
This, of course, raises the issue of how to confront the disparities between the tradable
and non-tradable sectors. 4 A tight monetary policy was not feasible, nor was exchange rate
policy, to stabilize prices given the supply sources of price stocks and the potential for a restrictive
monetary policy to stifl e economic growth and thus prevent structural adjustment.
What made possible the adjustment was the centralized, consensual incomes policies
(discussed in Chapter 5). The social and collective agreements beginning in 2001 ceased to
index wages to past infl ation but rather introduced forward looking indexation based on
expected infl ation pegged to a basket of measures including expected domestic infl ation,
EU infl ation and the euro exchange rate depreciation. Some social transfers, excluding pensions,
were also re-indexed to expected rather than past infl ation.
The wage agreements with the private sector were negotiated to increase at one percentage
point below the expected rate of productivity increase thus lowering labour cost
pressure on prices and reducing excess consumer demand pressure, while still maintaining
or increasing real wages. In the public sector, however, the agreement was designed
to actually reduce real wages. This was important because public sector wages represented
around a third of the total wage bill in the economy. »The wage agreement with
public sector labor unions meant a reduction in public sector real wages. Furthermore,
it allowed the amount of the already agreed indexation of wages to be converted to individual
contributions to a newly created second pillar public sector pension fund.« These
agreements had a secondary effect of reducing indexation of pensions »... as pension
increases were tied to the approximate average increase of wages and CPI.« (Bole and
Mramor, 2006, p. 110) Indeed, in the landing period, 2000-2004 pension expenditures
as a percentage of GDP did drop slightly. (Bole and Mramor, 2006, p. 113) In addition,
the impact of the social and collective agreements with the unions was more important
than just the lowering of supply side costs. They also reduced infl ationary expectations
despite the other increased supply side price increases such as oil prices and taxes.
The combination of a restrictive monetary policy, cutbacks in fi scal expenditures,
de-indexation of the domestic economy, a social agreement and incomes policy reducing
public sector salaries and restricting market sector wage increases to less than productivity
growth proved very effective in controlling infl ation. During the landing period the
rate fell to a level that
4 Bole and Mramor defi ne the tradable sector as comprised of those industries competing with
foreign producers and, hence, whose market power to raise prices is tightly constrained by competition
under the EU common market. That is, the tradable sector is comprised of manufacturing,
the non-tradable all the other industries excluding public administration, health and education.
(Bole and Mramor, 2006, p. 99)
685

Table A.1
Infl ation: 2000-2006
Year 2000 2001 2002 2003 2004 2005 2006
Infl ation Rate (CPI) 8.9 8.4 7.5 5.6 3.6 2.5 2.5
Source: Slovenian Economic Mirror, July 2007.
not only eased Slovenia’s entry into the EU but allowed it to almost immediately enter
into the ERM2 system leading up to full entry in the EMU after the mandatory two year
demonstration period of macro and exchange rate stability.
686
MACROECONOMIC PROGRESS IN THE CONVERSION-LANDING PERIOD
The challenge of economic policy in the landing period was to reduce infl ation to
within the Maastritch limits and, in the process, converge real and nominal interest rates
with prevailing Eurozone rates and maintain a stable exchange rate between the tolar
and euro, without signifi cantly retarding economic growth or increasing unemployment.
The reduction in infl ation and interest rates and the stabilization of the exchange rate
had to be achieved by the time of entry into the EU when adherence to the Growth and
Stability pact and EU directives sharply constrained fi scal, monetary, and foreign trade
policy. Once in the EU, entry into the ERM2 further constrained monetary policy while
maintenance of a stable exchange rate for a minimum period of two years was a mandatory
condition for entry into the EMU.
In fact, except for minor but perceptible slowing of growth rates in 2001 and 2003 that
were, at least in some part, due to unfavourable weather conditions for agriculture, the
Slovenian economy performed surprisingly well during the landing period while achieving
its goals of lowering infl ation, converging interest rates, structural rebalancing, and
a stable exchange rate. The macroeconomic record for the convergence period is set out
in table A.2
Table A.2
Macroeconomic Indicators for Slovenia: 2000-2004
2000 2001 2002 2003 2004
GDP real growth rate 4.1 2.4 3.5 2.7 4.4
Current account balance (%GDP) -2.8 0.2 1.0 -0.8 -2.6
Unemployment (ILO defn) 7.0 6.4 6.4 6.7 6.3
Gross real wage growth rate 1.8 3.2 2.0 1.8 2.0
Private Sector 1.3 2.3 2.3 2.1 3.1
Public Sector 2.1 6.1 1.1 1.0 -0.8
Labour Productivity 3.3 2.2 3.9 3.1 3.9
Exchange rate (tolars/euro) 205.0 217.2 226.2 233.7 238.9
Infl ation (annual average) 8.9 8.4 7.5 5.6 3.6
BofS Interest rates
120 days 4.29 4.00 3.15 2.18 2.03
270 days 9.35 11.16 9.72 7.44 4.70
Source: IMAD, Spring Report, 2006; BS, Monthly Bulletin, June 2005.

According to the Bank of Slovenia and Bole and Mramor, long-term interest rates fell
below the Maastritch criterion in early 2003 and by 2004 were signifi cantly, by between
one and two per cent, below the interest rate criteria by the time Slovenia entered into
the EU in 2004. (BS, Monetary Policy Report, 2006, p. 53-54; Bole and Mramor, 2006, p.
114) Writing in 2006, the Bank notes:
Slovenia has long met the long-term interest rates criterion. This requires long-term
interest rates in a country aiming to join the euro to be no more than 2 percentage
points higher than the unweighted average of long-term interest rates in the three EU
countries with the best price stability results, with the yield on long-term government
securities taken as the reference. The spread between the reference rate and Slovenia’s
long-term interest rates recorded a sharp, sustainable fall in the period to the beginning
of 2005, and since then have remained relatively low. (BS, Monetary Policy Report,
2006, p. 53-54)
STRUCTURAL CHANGE
A central argument in Bole and Mramor was that the key to reducing infl ation was
structural change, more specifi cally in promoting a more productive and competitive
structure in the non-tradeable sector, essentially the non-manufacturing domestic economy
excluding public administration. Manufactured goods prices were controlled by exposure
to competition from EU countries and from the emerging giants such as China
under the global liberalization of trade promoted by the World Trade Organization.
What is perhaps somewhat surprising is how resilient Slovenian manufacturing really
was to this new competitive environment, both before and after entry into the EU.
This is demonstrated in table A.3 which traces the structure of GDP in the period. This
resilience to global competition is indicated by foreign trade statistics (table A.4) which,
except for the recession-induced relative decline in the European market from 2001 to
2003, have shown consistently high rates of growth in exports of capital and industrial
goods, generally as high or higher than growth rates of comparable imports. However,
this is also largely true of services which would indicate that the service sector has become
more competitive than suggested by Bole and Mramor.
The destination of exports and the source of imports has also shown a fairly consistent
orientation over the period of convergence and EU membership. Non-European trade
is relatively unimportant as both a market and as a source of goods and services. Entry
into the EU seems to have had little effect on the pattern of foreign trade except, perhaps,
a slight displacement effect with respect to imports from non-European countries, both
developed and developing.
The other strong piece of evidence of the resilience of the manufacturing sector is that
its share of GDP declined only marginally in the period of convergence after 2000 and,
after a slight drop on EU accession, appears to have stabilized at around 21 to 22 per cent
of GDP. This compares favourably to the primary (natural resource) sector which has
seen its share decline by
687

Table A.3
Share of GDP by Selected Industry: Slovenia 2000-2007 (% of Total GDP)
2000 2001 2002 2003 2004 2005 2006* 2007**
Agriculture, forestry,
hunting and fi shing 2.8 2.6 2.7 2.2 2.3 2.2 2.0 2.0
Mining 0.6 0.5 0.4 0.5 0.4 0.4 0.4 0.4
Total Primary 3.4 3.1 3.1 2.7 2.7 2.4 2.4 2.4
Manufacturing 23.0 23.2 22.6 22.9 22.4 21.4 21.8 21.5
Industry and construction 31.4 31.3 30.6 30.9 30.4 29.7 30.2 30.0
Total Secondary 30.8 30.8 30.2 30.4 30.0 29.3 29.8 29.6
Non-tradable services 34.7 35.2 35.5 35.8 37.0 37.3 37.4 37.8
Public sector services 17.8 18.2 17.8 17.9 17.3 17.9 17.5 17.4
Total Tertiary (services) 52.5 53.2 53.3 53.7 54.3 55.2 54.9 55.2
Indirect taxes net
of subsidies 13.3 12.9 13.3 13.2 13.0 12.9 12.8 12.8
* Estimate
** Forecast
Source: IMAD, Spring Report, 2007, Statistical Appendix
Table A.4
Foreign Trade Growth Rates: Slovenia 2000-2007 (Nominal Growth Rates in %)
2000 2001 2002 2003 2004 2005 2006* 2007**
Exports of goods 18.2 9.2 6.0 3.0 13.3 19.9 16.4 14.0
Capital goods 20.2 16.4 8.9 6.1 14.6 10.1 21.3 13.2
Intermediate goods 23.0 8.7 4.1 4.2 16.1 10.5 20.6 14.4
Consumption goods 11.9 7.4 7.4 0.4 9.1 17.4 9.0 13.6
Exports of Services 16.3 6.1 12.0 1.0 12.9 15.4 9.3 10.4
Imports of goods 16.6 3.1 1.9 5.4 16.6 12.1 15.9 12.2
Capital goods 8.9 1.3 3.0 11.7 8.4 5.5 17.2 10.2
Intermediate goods 26.3 2.1 1.6 3.5 19.0 14.5 16.0 12.5
Consumption goods 1.3 7.3 1.8 5.3 17.3 10.8 14.5 12.7
Imports of services 9.0 5.1 10.8 5.7 8.9 12.3 12.6 10.6
* Estimate
** Forecast
Source: IMAD, Spring Report, 2007, Statistical Appendix
Table A.5
Distribution of Foreign Trade by Source or Destination: Slovenia 2000-2006
(% of total trade by country of source or destination)
2000 2001 2002 2003 2004 2005 2006
Exports to:
Developed
industrial countries* 70.7 58.1 66.1 65.9 73.6 74.2 74.5
EU 15 63.8 62.2 59.4 58.4 58.2 59.3 58.9
Developing countries** 29.3 31.9 33.9 34.1 26.4 25.8 25.5
Former Yugoslavia 15.7 16.9 17.8 17.4 17.6 17.2 16.3
Non-European developing
countries 2.4 2.4 2.6 2.4 2.4 2.1 2.1
Imports from:
Developed industrial countries* 78.2 77.2 77.3 76.5 87.8 86.5 85.6
EU 15 67.8 67.6 68.0 67.3 73.5 71.8 71.2
Developing countries** 21.7 22.8 22.7 23.5 12.2 13.5 14.4
Former Yugoslavia 5.4 5.3 5.0 5.0 5.7 6.5 7.4
Non-European developing
countries 4.1 4.8 5.3 6.1 3.2 3.4 3.7
* Includes the new entrants to the EU 2004-2006
** Excludes the new entrants to the EU 2000-2006. Including the new entrants into the developing countries would give
comparable fi gures for 2004-2006 as follows:
688

2004 2005 2006
Exports to developing countries 34.7 34.4 35.1
Imports from developing countries 21.0 22.6 23.4
Source: IMAD, Spring Report, 2007, Statistical Appendix
around a third, largely due to the relative decline in Agriculture, hunting and forestry.
The construction industry, on the other hand, has fl uctuated reaching a minimum in the
late landing or convergence period before expanding robustly after entry into Europe.
Utilities, in contrast, have been quite stable.
In general, the convergence and post-EU accession periods have been characterized
by a gradual structural shift in GDP in favour of the tertiary, or service, sector, almost all
accounted for by the growth of market, non-tradable services (wholesale and retail trade,
hotels and restaurants, transport, storage and communications, fi nancial intermediation,
real estate, renting and business activities.) Of these industries, only hotels and restaurants
and fi nancial intermediation showed no secular trend to an increased share over the entire
period. On the other hand, the public sector (including community, social and personal
services) showed a remarkable stability over the entire period fl uctuating between a high of
18.2 per cent of GDP in 2001 and a low of 17.3 per cent in 2004. On entry into the Eurozone
in 2007 the public sector was estimated to be 17.4 per cent of GDP.
The relative structural stability GDP shares, however, has not extended to the labour
market where employment in goods production, particularly in the primary sector, has
fallen quite rapidly over the convergence and EU periods. Indeed, mining was the fasted
declining employer
Table A.6
Average Annual Employment Growth by Selected Industries and Sectors: Slovenia, 2000-2007*
(average annual percentage growth)
2000-2004 2004-2007 2000-2007
All industries 0.4 0.7 0.6
Agriculture, hunting and forestry -3.0 -2.4 -2.8
Mining -8.5 -6.0 -7.2
Manufacturing -0.9 -1.3 -1.1
Utilities -1.2 -0.3 -0.6
Construction 1.0 3.5 2.4
Goods production -1.1 -0.6 -1.0
Market services 2.2 2.0 2.1
Public and personal services 1.7 1.9 1.7
*2007 fi gures are IMAD forcasts.
Source: IMAD, Spring Report, 2007, Statistical Appendix
with an average drop in employment in excess of seven per cent per year. This contraction
was particularly rapid in the convergence period. The relatively slow decline in employment
in manufacturing can be explained by the growth in production in a number of major
manufacturing industries in Slovenia, in particular chemicals, man-made fi bres, rubber
and plastic; basic metals and fabrication; machinery and equipment; electrical and optical
equipment; and transportation equipment. The growth in these industries offset to a
considerable (but incomplete) extent the rapid decline in the traditional labour intensive,
low technology, industries, particularly the textile, leather, non-metal mineral and food industries.
(See table A.7)
689

Table A.7
Indices of Production and Employment: Selected Industries: Slovenia 2000-2006 (2000 = 100)
Production 2000 2004 2005 2006
Industry, total 100 112.8 116.5 123.6
Mining 100 97.6 104.2 114.9
Manufacturing 100 111.6 115.6 123.1
Food, beverages & tobacco 100 89.4 88.0 86.8
Textiles & textile products 100 61.7 54.1 52.2
Leather & leather products 100 68.2 72.7 76.5
Wood & wood products 100 94.7 100.7 104.1
Paper, publishing & printing 100 101.2 104.8 103.8
Chemical products & and
man-made fi bres 100 147.5 158.7 179.4
Rubber and plastics 100 116.5 122.2 130.0
Non-metal mineral products 100 84.5 78.7 83.6
Basic metals & fabricated products 100 107.8 116.3 129.8
Machinery & equipment 100 138.5 140.9 149.5
Electrical & optical equipment 100 153.0 157.7 181.9
Transportation equipment 100 152.7 184.7 177.4
Utilities 100 132.9 130.9 129.6
Construction 100 108.4 111.7 128.8
Employment
Industry, total 100 100.2 98.5 96.9
Mining 100 77.2 73.2 70.2
Manufacturing 100 100.9 99.1 97.4
Utilities 100 99.1 100.0 100.0
Construction 100 97.5 102.0 109.6
Source: Slovenian Economic Mirror, July 2007 and selected earlier issues.
The rise of almost a quarter in industrial production despite a decline in aggregate
employment of just over three per cent between 2000 and 2006 is one obvious explanation
of the rapid labour productivity growth rate recorded in table A.3. Compounded over
the 2000-2006 period, labour productivity increased by around 27 per cent. In manufacturing
as a whole, production rose 23.1 % while employment declined by 2.6 % indicating
a productivity gain of around 26 per cent. The comparable increases in mining, utilities
and construction are approximately 21%, 30% and 12% respectively. Part of the explanation
of manufacturing’s productivity performance is undoubtedly the decline in the low
productivity, labour intensive industries (food, textiles, leather and wood) relative to the
higher productivity and capital intensive industries such as transport equipment, chemicals,
machinery and electrical and optical equipment.
In any case, the low levels of unemployment combined with the strong productivity
growth and export performance contradicts the often heard criticism of Slovenia’s recent
economic record, that the country’s labour market is too infl exible for effi cient and competitive
economic performance. Domadenik, Kase and Zupan (2006, p. 148), for instance,
have argued that »[b]ecause the social security system for the unemployed is already
relatively generous, [Slovenia] needs more fl exible fi ring process regulations.« (See also
Pransikar, 2006, p. 11) However, as Stanojevic has demonstrated, increased intensity of
work combined with strong union support and enhanced fl exibility and contract employment
proved to offset external labour market and numerical rigidity even with relatively
high and rising real wages in the transition period. (Stanojevic, 2006, pp. 157-181) The
record in the convergence and EU periods indicates that infl exible labour markets have
not been the obstacle to economic growth that free market economists had postulated.
690

This issue of market deregulation and de-institutionalization has been at the forefront
of the debate over economic policy in Europe for the better part of the last decade. This
is summarized by Prasnikar in his introduction to the 2006 collection Competitiveness,
Social Responsibility and Economic Growth. »Is is precisely the exaggerated institutionalization
in all areas, which is a consequence of the tendency towards predictability and
people’s preference for low risk taking, is a weak point of Continental Europe. In times
of globalization it has no choice. .... Free entry in all areas will lead to greater competitiveness
and hence to increased productivity.« (Prasnikar, 2006, p. 7) This neoliberal diagnosis
has been central to the internal Slovenian criticism of economic policy during the
period since independence; that, despite the economic success in the transition process,
the country has failed to de-institutionalize and deregulate economic markets, in particular
the labour market. This, according to the neoliberal consensus, will restrict productivity
and income growth in the future. Prasnikar goes as far as noting that Slovenia »has a
high level of social protection, but this burdens its competitiveness and slows economic
growth.« (Prasnikar, 2006, p. 11)
The context of the Slovenian critique is the Lisbon Strategy, the EU’s strategic program
adopted in 2000 to make Europe »the most competitive economy [in the world] by
2010.« It is most explicitly expressed by Boot in his contribution to the Prasnikar collection,
»The EU and Economic Growth.« Boot argues that current institutions and practices
in Europe act as a drag on competition and productivity resulting in its poor performance
relative to the market-driven USA. (Boot, 2006, pp. 20, 23-24) The basic assumption
behind the Lisbon Strategy is that »competition is at the core of increasing productivity,«
and that increasing market based high-tech and entrepreneurial fi rms are the secret to
increasing both. (Boot, 2006, pp. 26-27; see also Prasnikar, 2006, p. 7)
The Lisbon Strategy was conceived around the EU program to abolish all obstacles
to the free movement of goods, services, people (labour) and capital, in order to promote
economic growth. This further required the expansion of R&D, education and infrastructure
within a stable and non-infl ationary macroeconomic environment (the Stability and
Growth Pact) while promoting inter- and intra-national cohesion (convergence of living
standards). As the Kok (2004) and Sapir (2003) reports to the EU 5 concluded, however,
the results of the Lisbon Strategy were »not very encouraging.« (Boot, 2006, p. 19) As a
result, in 2005 a »Revised Lisbon Strategy« 6 was developed which attempted to address
the problem of the failure to achieve the original Lisbon goals by focusing on policies of
realization, in particular of increases in R&D and »the development of innovative climate
in the fi eld of entrepreneurship ....« (Prasnikar, 2006, p. 4)
In response to the criticism in the Sapir and Kok reports that the EU-wide Lisbon
Strategy was too broad to be effectively implemented and that the failure of individual
countries to reform their institutions, structures and practices Prasnikar is lead to the
conclusion that each country, including Slovenia, »needs its own »Lisbon« that will per-
5 Kok, et. al., 2004, »Facing the Challenge: The Lisbon Strategy for Growth and Employment.«
Report from the High Level Group chaired by Wim Kok; Sapir, et. al., 2003, »An Agenda for a
Growing Europe: Making the EU Economic System Deliver.« Report of an Independent High Level
Group to the President of the European Commission.
6 AIt is described in two documents of the European Commission: »Integrated Guidelines for
Growth and Jobs (2005-2008).«, April 4, 2005, and »Working Together for Growth and Jobs. Next
Steps in Implementing the Revised Lisbon Strategy.« April 29, 2005. (Prasnikar (2006) p. 4, footnote
4.)
691

form against the inertia of the existing institutions.« (Prasnikar, 2006, p. 7) Just how effective
a national »Lisbon strategy« would be, however, may be questioned. First, the relatively
poor performance of the EU economies relative to the US has been associated with
the more restrictive monetary and fi scal policies embedded in the Stability and Growth
Pact, in particular the restrictive monetary policy implemented to contain infl ationary
pressures. (See, for instance, Palley, 2001) The US, by contrast, has been exercising an
extraordinarily loose monetary policy with extremely low interest rates and the fl ooding
of US fi nancial markets with liquidity while infl ationary pressures have been constrained
by an elastic supply of low cost goods and services provided in particular by China (with
its fi xed exchange rate relative to the US) and India, though at the expense of an unsustainably
high and rising current account defi cit.
In addition, the US economy has been fueled by excessive government expenditures
and defi cits for most of the 21st century, particularly with the rising expenditures for the
wars in Iran and Afghanistan. A very signifi cant part of these defi cits are for the military-industrial
complex which is the leading R&D sector and which is guided by government priorities
and policies, not by markets. Furthermore, a signifi cant element in reported US productivity
and economic growth can be accredited to the intensifi cation of labour through
longer hours which now exceed European levels by multiple weeks of work per year.
Also, the reported productivity performance in the US has been called into question
because of the proliferation of outsourcing and offshoring by American manufacturers
and there effect on the measurement of productivity. 7 »Whether, for instance, productivity
growth derives from a better-educated, more effi cient U.S. workforce, from investment
in capital equipment in U.S. establishments, or from the use of cheap foreign labor
affects how productivity gains are distributed among workers and fi rms in the short term
and undoubtedly matters for U.S. industrial competitiveness and living standards in the
long term.« (Houseman, 2007, p. 1) Given the stagnation of real wages in the United
States in the 21st century and the loss of manufacturing jobs, particularly higher paying
jobs, leads one to question the meaning of US productivity fi gures. Furthermore, how
much of apparent average productivity gain has resulted from outsourcing of low productivity
jobs or relegating them to the informal, or grey, economy is not known.
In any case, the assessment of the relative health of the European economies, including
that of Slovenia, was completed before the recent problems in the American economy
with the collapse of the sub-prime, low-interest and lending-induced housing bubble and
the rapid decline in the value of the American dollar. The rise of the euro and the success
of Europe in curbing its usage of fossil fuels, in contrast to the US’s surging demand for oil,
augers well for an acceleration in European productivity, competitiveness and economic
growth relative to the USA even if the American economy avoids falling into a prolonged
recession as many economists fear.
Slovenia, on the other hand, is not well positioned to avoid the dislocations of rising energy
costs nor of curbing the emission of green house gases (GHG) as required by the Kyoto
Protocol. With respect to the latter, Slovenia is committed to lowering GWG emissions by 8
per cent relative to the 1986 base year by 2012. However, her record is not favourable, with
7 »First, outsourcing and offshoring are poorly measured in U.S. statistics, and poor measurement
may impart a signifi cant bias to manufacturing and, where offshoring is involved, aggregate
productivity statistics. Second, companies often outsource or offshore work to take advantage of
cheap (relative to their output) labour, and such cost savings are counted as productivity gains,
even in multifactor productivity calculations.« (Houseman, 2007, p. 1 (abstract))
692

an increase of GWGs in the convergence period 2000-2004 of 6 per cent, the 8th highest
growth rate of the EU25. (Mirror, June 2007, p. 22) As of 2005, GWG emissions were 0.5 per
cent above the 1986 reference level.
Part of the reason for Slovenia’s relatively poor record in increasing emissions has
been the country’s more rapid rate of economic growth relative to the EU average since
there is a strong correlation between economic growth and GWG emissions. On the
other hand, the growth in the economy over that period was more than twice the growth
of emissions indicating some progress in reducing emission intensity.
The main reason for Slovenia’s poor emission record is that the country as a whole
is highly energy intensive, primarily because of its industrial structure. In the 2000-2004
period, while energy intensity improved in the household and commercial sectors and
remained the same in transport, it deteriorated in manufacturing and construction, in
large measure due to the increase in energy intensity in non-metal mineral and metal
production, pulp and paper production and chemical manufacture. As the Mirror (May
2007, p. 17) notes:
Slovenia’s share of energy-intensive industries in manufacturing is one of the
highest in the EU. The share of value added generated in manufacturing industries
is among the highest in Slovenia. In 2005, it was the highest in the Czech Republic
(25.9%), followed by Slovenia (24.6%) and Ireland. However, this does not necessarily
indicate a high energy intensity of the economy, which also depends on the structure
of manufacturing industries. The Slovenian structure has above-average shares of all
energy intensive branches: non-metal, metal, and paper industries. The share of the
metal industry is particularly high, almost double the EU average.
The signifi cant increase in transportation emissions can be attributed to the growth
in road transport, including transhipment after joining the EU, and the investment in the
motorway network with a parallel neglect of the rail system and public transport. (Mirror,
May 2007, p. 17)
In any case, the projected rise in the price of energy, in particular of oil, as world
demand increases faster than world supply and as non-Opec sources of crude oil peak
and decline, does not auger well for Slovenia’s longer run growth and prosperity given
its energy intensive industrial structure. What it does is give more urgency to Slovenia’s
2005 (»revised Lisbon«) Development Strategy and its National Program of Research
and Development. The latter sets Slovenia on course to attain the Lisbon goals of public
R&D of 1% of GDP by 2008 and private sector R&D of 2% by 2010. (Prasnikar and
Kotnik, 2006, p.77) Such a research and development effort is a necessary, though not
suffi cient, condition for diversifi cation in the countries industrial structure away from
energy intensive industries. Also required is a culture of innovation and an absorption
capacity of industry to introduce new technology and innovation. A prerequisite of that
capacity is a qualifi ed labour force which implies a expanded post secondary education
system. As Prasnikar and Kotnik note, Slovenia faces »a problem of availability
of highly skilled individuals with technical education.« (2006, p.90) Furthermore, with
an aging population and work force, this will also require more intensive training and
retraining of the already employed labour force. As they conclude, »if a company will
not develop its absorption capacity and an adequate innovative climate and therefore
not improve its competitive capabilities through such R&D activity, the increased R&D
693

expenditure will be wasted.« (Prasnikar and Kotnik, 2006. P. 91) This conclusion applies
equally to Slovenia as a nation and not just to individual companies.
694
AGRICULTURE SPECIAL CASE
Quite in contrast to the neoliberal thrust of most EU economic policy stands Europe’s
agricultural strategy which is governed by the Common Agricultural Policy (CAP). Indeed,
agriculture is tightly controlled with a complete system of subsidies and production
quotas. The philosophy behind the CAP has always been the preservation of a viable
rural way of life based on a family farm structure. In short, the purpose was as much,
or more, cultural and political as it was economic. This is in sharp contrast to North
American agriculture which, despite the huge subsidies provided to US agriculture, has
been largely transformed into industrial agriculture dominated by a few large agribusiness
conglomerates and by large scale, capital intensive farming units with the resulting
depopulation of rural areas and the atrophying of small town America.
For Slovenia’s bid to join the EU, the orientation and goals of the CAP posed a lesser
challenge to the country’s agriculture sector than did entry into the common market by
other traditional industries. As a part of Yugoslavia, Slovenia had maintained a policy of
small, private, family-based farms (99% of agricultural holdings) and regulated markets
which not only maintained a viable, if not always prosperous, rural and small town and
village population, but also provided a »semi-proletarianized« labour force 8 for a deliberately
spatially-dispersed industrial sector. During the Yugoslav period, the primary goal
of agriculture was food security which was promoted by federally set prices supported by
input and investment subsidies and protection of the food processing industry. (Erjavec,
Rednak, Volk and Turk (hereafter ERVT), 2003, p. 559)
Change to agricultural policy came only slowly after independence. Modifi cation of
the pre- transition system only began with new policy guidelines in 1993 with the following
goals:
(i) stable production of cheap and good quality food and food security in Slovenia;
(ii) preservation of population density, cultural landscapes and agricultural land ...
[and] protection of agricultural land and water from pollution and misuse; (iii) permanent
increase of competitiveness; (iv) guaranteed parity income for above-average
producers. (ERVT, 2003, p. 559)
However, administered prices were maintained for many basic food products, the
state monopoly was retained for wheat and sugar, and inputs continued to be subsidized
as were the wheat, sugar and dairy processing sectors. Although restrictions on land
ownership and use were eliminated, policy remained concentrated on the continuation
and consolidation of the family farm with programs promoting land consolidation, investment
and rural development, which were oriented particularly to the less-favoured
agricultural regions. On the other hand, pressure from membership in the WTO and
other regional and bilateral trade agreements inevitably invited a reduction in border
8 The term semi-proletarianized labour force was coined to refer to farmer's in rural areas of
the Canadian Maritimes who supplemented a subsistence living from agriculture and harvesting
timber plots with wages earned by working in the pulp and paper and lumber mills in the region
which were owned and operated by major forest corporations.

protection and more import competition. At the same time, Slovenia was bringing its
agricultural policies more in line with the CAP and the acquis as part of its pursuit of EU
membership. This led to the adoption of a new agricultural policy program in the late
1990s with goals not materially different from those of the previous policy B an »eco-social
orientation«, sustainable development and environmental protection B but through
different measures and forms of support. The reforms, launched in 2000 »switched the
burden of agricultural support from the consumer to the taxpayer, which means also a
changeover from a market price support policy to a policy of budgetary support (direct
payments, compensatory allowances, development support.)« (ERVT, 2003, p. 560) As
Erjavec has shown, Slovenia had begun the process of replicating CAP structures and
policies long before its entry to the union was approved.
In the preparations for EU membership the agricultural policy in Slovenia had to
undergo a comprehensive transformation. Whilst preserving the level of supports, their
nature had to change. Gradually, Slovenian agricultural policy transposed the goals and
mechanisms of CAP and has to a large extent put in place a comparable agricultural
policy well before the accession. Simulating CAP was a clearly defi ned goal of Slovenian
agricultural policy, as it wanted to assure a »soft landing« of agriculture on the common
market and the timely establishment of comparable institutions as the necessary change
in mentality. In line with the [1992 CAP] MacSharry’s reform, the agricultural policy in
Slovenia lowered the level of price supports and compensated for the loss of incomes
by direct payments. During this transformation process, it was, however, less effi cient
in restructuring and the development of agriculture and rural areas. (Erjavec, 2004b, p.
118)
Indeed, by 2003, direct payments from the Slovenian treasury to producers had
reached a level of 75% of the EU-15 level. (Volk, Rednak and Erjavec (hereafter VRE),
2007, p. 243)
One result of this policy shift was a rapid increase in budget expenditures on agriculture
in the 1997-2001 period, in large measure due to an increase in direct payments to
producers. This, of course, was one of the elements of fi scal shock that bedevilled macroeconomic
policy makers in lowering infl ation and meeting the Maastritch requirements
in the 2000-2003 period discussed previously. However, it should also be noted that border
protection of around 10% ad valorum on agricultural products also remained throughout
the convergence period providing a measure of support to agricultural producers.
EU ACCESSION
Slovenia’s convergence to the rules and institutions of the EU and its subsequent
integration into the CAP shares, with macroeconomic policy and integration into the
EMU, the characterization of a »soft landing«. The process began with consultations and
negotiations with the European Commission on implementation of the acquis relating to
agriculture and subsequently on the fi nancial issues related to the CAP, including quotas,
direct payments, and resources for rural development, which were spread over the period
from 1998 to 2002. (Erjavec, 2004b, p.118)
The initial position of the European Commission was that direct payments would begin
at 25% in 2004 on entry to the EU rising to 100% by 2013. Citing the negative effects that
would have on its producers’ incomes, Slovenia proposed that it be permitted to top up
695

the EU payments from the national treasury and, in the compromise reached, was allowed
to make direct payments beginning at 75% of the existing EU level in 2003, 85% in 2004
and rising by 5% a year until reaching 100% by 2007. 9 This was the highest level of national
support permitted by the Commission for the ten candidate countries. This meant that
Slovenia’s fi scal commitment, initially very large, would begin to be taken over by the EU
on accession but would only begin to decline signifi cantly after 2007 when Slovenia’s share
of direct payments would begin to fall. (VRE, 2007, p. 249; see also fi gure 1, p. 250) Despite
this fi scal shock, however, the expenditures were justifi ed
696
... in public fi nance terms as they may be considered a kind of investment in longterm
infl ows from the EU budget. This is because it is expected that according to the
Commission proposals, sooner or later, the CAP will undergo a reform under which
new farmers’ rights will be based on their past rights. (ERVT, 2003, pp. 565-566)
Slovenia was also able, using negotiations at the technical level, to greatly improve on
the initial Commission position with respect to quotas and reference quantities, initially
set well below Slovenia’s expectations and negotiating position. As a result, the fi nal
agreement provided for production levels in no case below existing production levels and
in some areas provided for expansion. This was doubly important since, with projected
CAP reform that would decouple direct payments from production levels, the national
entitlement envelope would be calculated on the basis of existing agreed production levels.
(VRE, 2007, p. 249)
Perhaps even more favourable was Slovenia’s negotiations with respect to rural development
funds »promoting environmentally friendly agriculture, preservation of cultural
landscape and rural settlement ....« which totalled around 250 million euros, more than
its entitlement under other structural and regional policies and programs. Though also
involving a fi scal commitment from the national budget, they are considered »less distorted
forms of protection and involve the kind of income supports for agriculture which
are expected to last longer than the present market price policy.« (EVRT, 2003, p 566) If
transport and energy costs continue to rise as many forecasters expect, thus favouring
local production over industrial, export-import oriented agriculture, the negotiated result
may prove even more important than it presently appears.
Thus, Slovenia’s transition policies and the negotiated conditions regulating entry
into the CAP meant that entry into the EU did not bring any major disruption to agriculture
despite the opening up of the industry to increased competition from within Europe,
falling producer prices and its unfavourable natural conditions, farm size and capitalization.
The same can not be said for the food processing industry, however, particularly
the dairy sector and fruit and vegetable processing. The dairy sector, highly protected in
the pre-accession period through export subsidies, contracted substantially when these
subsidies were withdrawn on EU entry. The fruit and vegetable sector, on the other hand,
suffered from the loss of »previously favourable conditions« in its export markets in the
former Yugoslavian republics. (VRE, 2007, p. 259) Subsidies for exports virtually disappeared
after accession. (VRE, 2007, p. 251)
The soft-landing for agriculture is supported by data since EU entry. Budgetary expenditures
rose by around 40 per cent between 2000 and 2004, the biggest increase being
9 The Commission had argued that agriculture in the candidate countries except for Cyprus
and Slovenia would benefi t from accession even without any direct payments. See Erjavec, 2004a,
p. 746.

in market price supports and, secondarily, in regional development expenditures. In the
year following entry, budgetary expenditures increased a further forty per cent fi nanced
by transfers from the EU budget. The Slovenian budget accounted for around 90 per cent
of agricultural support payments in 2003 but just over half in 2005 and was scheduled to
fall steadily until 2007 when EU support reaches the 100 per cent European support level
for direct payments. (Values are authors’ estimates based on the graphical data presented
in Rednak, 2006) Agricultural income has also shown no major negative trends.
After the accession the factor income stabilised at the relatively high level compared
to previous years. The trends from the past have continued B a slightly upward trend
in agricultural output volume, a downward trend in producer prices and a substantial
increase in subsidies for farmers. The situation after the accession thus changed little for
producers, and it has remained relatively favourable for agriculture in general. However,
the structure of income changed signifi cantly B the share of all forms of subsidies to
producers has increased gradually to the level of about 50%. (VRE, 2007, p. 255)
Not all sectors of agriculture, however, have fared equally since accession. Some sectors,
such as beef producers, have benefi tted considerably from EU membership while
others, such as cereals and sugar beet producers, have been negatively affected. (VRE,
2007, pp. 255-256)
Despite the »soft landing« of agriculture in the EU, the fact remains that Slovenian
agriculture still faces many of the same challenges it has faced over its history. Generally
speaking, the geography of the country is not very hospitable to agriculture. Although
agricultural land constitute 34% of Slovenian territory, 10 three quarters is classifi ed as lessfavoured
agricultural areas (LFA), primarily in alpine and hilly regions where agricultural
land is limited to valley bottoms and land holdings are highly fragmented. Only just over
one third of agricultural land is arable, almost two thirds is permanent grasslands, while
an additional 6% is utilized as vineyards and orchards. (Erjavec, Rednak and Volk, (ERV)
2003, pp. 761-2:Markes, 2000, p. 1) Not only are Slovenian farms generally very small even
by European standards, 11 they are highly fragmented with an average of 7.2 parcels of agricultural
land per land holding each averaging 1.4 ha in size. (Ravnikar and Tanko, 2006, p.
1) Furthermore, though there was an upward trend in farm size and a downward trend in
the number of farms after independence, particularly in the early 1990s and in the convergence
period, since accession the number and average size has stabilized. (See table A.8)
Moreover, the majority, almost sixty per cent, are 5 ha or less in size.
Table A.8
Number and Size of Farms Slovenia: 1991-2005
1991 1997 2000 2003 2005
Number of farms 111,951 90,830 86,467 77,150 77,174
Farm land in use (000 ha) 469.2 466.6 485.9 486.5 485.4
Average size (ha) 4.2 5.1 5.6 6.3 6.3
Source: Rednak, 2006, »Kmetijska Gospodarstva Ob Popisih«
10 60% is forest.
11 In comparison to the most of the EU countries, farms in Slovenia are extremely small (average
about 5 ha). In 1931 the average Slovene farm was almost the same size as the average central
European farm: however, it is fi ve times smaller than in the EU in terms of agricultural land today.
(Markes, 2000, p. 2) Other sources using 2005 data state the average size as three times smaller
than Europe. (VRE, 2007, p. 256; Ravnikar and Tanko, 2006, p. 1)
697

The large number, dispersion and small size of farms, however, supports in part one
of the agricultural policy goals of the government, the »preservation of population density,
cultural landscapes and agricultural land.« (VRE, 2007, p. 247) Despite the decreasing
importance of agriculture both in terms of employment and as a share of employment
(see table A.9):
... agriculture remains an important factor of development and social stability in
the rural areas. Slovenia is a country where rural areas cover 89% of total territory
(according to OECD criteria) and 57 % of total population live in these areas. (ERV,
2003, p. 762)
Thus, maintaining rural population density confl icts to a considerable extent with
major increases in the size of land holdings and the goals of increased competitiveness
and parity incomes for effi cient farmers. Indeed, as the initial fi gures indicate, the application
of the CAP in its current form appears to have stabilized farm size. In addition, no
money is allocated from the EU budget for fi nancing land consolidation (at least before
2007) while the construction of the motorway system has tended to exacerbate the problem
of farm fragmentation. (Ravnikar and Tanko, 2006, pp. 2, 5)
Table A.9
Agriculture and Food Processing Industries Share of GDP and Employment: Slovenia 2000-2006
2000 2003 2004 2005 2006
Share in GDP (%)
Agric, hunt, forestry 2.8 2.2 2.3 2.2 2.0
Food processing 2.4 2.3 2.0 1.7 na
Share of employment (%)
Agric, hunt, forestry 11.9 10.8 10.3 10.0 9.6
Food processing 2.6 2.4 2.4 2.2 na
Share of trade in goods (%)
Agro-food exports 3.8 3.6 2.8 2.9 3.1
Agro-food imports 6.4 6.3 6.3 6.5 6.4
na = not available
Source: Volk, Rednak and Erjavec, 2007, p. 3.
Although exports to Europe did increase after joining the common market, they were
not suffi cient to offset the drop in exports to the former Yugoslav republics. Exports to
the western Balkan republics ,which accounted for around half of Slovenia’s agricultural
exports, fell by a third in the fi rst eight months of EU membership from the comparable
period in 2003. (But, 2005, p. 6) As a result, agriculture’s share of Slovenia’s total exports
fell signifi cantly though they recovered marginally in the following two years. On
the other hand, the import share has remained remarkably stable 12 indicating that Slovenian
agriculture, despite its inherent disadvantages and despite the increase in the net
agricultural products trade defi cit, has remained relatively competitive under the CAP
regulatory system. Whether this will continue to be the case when the EU implements
proposed reforms to the support system remains to be seen.
12 The EU share rose from around 70% to over 80% after accession but this was largely accounted
for by the inclusion of the other applicant countries from central Europe in the EU. The
decline in imports from the western Balkans was small, at least in the 8 months after accession, by
about 7%. (But, 2005, p. 6.)
698

CONCLUSION: COMPLETING THE UNION
Slovenia’s entry into the EU in 2004 did not mark the end of the process of its integration
into Europe. Two further moves were required, entry into the Eurozone (adopting
the euro as Slovenia’s currency) and integration into the Common Agricultural Policy.
Both these goals were achieved by 2007. Moreover, they were both achieved with minimal
disruption to the macro economy or to the agricultural industry, a tribute both to Slovene
macroeconomic policy makers and to the negotiating skill of those who piloted the
integration of the country’s agricultural industry into the complex and highly regulated
and protective CAP.
Slovenia was able to reduce its infl ation and interest rates and stabilize its exchange
rate to meet the euro entry conditions in the »soft landing period« (2000-2004) without
signifi cantly reducing macroeconomic performance, or economic or productivity growth.
Furthermore, it was able to maintain these conditions for the two year minimum period
required as a condition for entry into the Eurozone which was achieved, with little diffi
culty, at the beginning of 2007. While much credit has been to Slovenian fi scal, monetary,
fi nancial and exchange rate policy makers, much more credit should accrue to the
unions, the government and the employers who devised and implemented an incomes
policy that was critical to reducing infl ation and restructuring wages without impairing
real wage growth or restricting employment. Without such a consensual policy the »soft
landing« and seamless entry into the Eurozone would have been much less likely. In
short, the decision to eschew neoliberal labour market policies in favour of a negotiated
social contract was critical to Slovenia’s successful accession to the Eurozone.
The success of Slovenia’s transition to the European agricultural system, on the other
hand, can be attributed to several factors. First was the legacy of the Yugoslav system that
had maintained private land holdings and the family farm structure of agriculture that
remains the basis of the European system. At the same time, farm income was bolstered
by administrative pricing and input subsidies. Second, on independence, Slovenia began
modelling her own agricultural policy on the CAP and, in anticipation of falling producer
prices after EU entry, began shifting support for agricultural incomes from market (consumer)
prices to support payments from the national budget during the convergence
period . This was a fi scal shock that made macroeconomic policy somewhat more diffi
cult but it allowed Slovenia to come into the EU and the CAP with support payments
at seventy fi ve per cent of the pre-accession European level rising to 100 per cent by
2007, increasingly fi nanced by the EU. Thirdly, the reliance on technical negotiations at
the individual product sector proved successful in procuring quotas and reference levels
equal to, or exceeding, existing production levels thereby allowing producers to maintain
output and income levels.
The success of Slovenian accession to the EU and the smooth transition to the Eurozone
and the CAP, however, has raised some concerns about the country’s economic
future. Its industrial structure has changed relatively little and its industrial success has
relied upon the intensifi cation of labour and the expansion of energy intensive industrial
sectors. In view of the global warming crisis and the potential of rising energy prices with
the prospect of peak oil, the current industrial structure may well prove problematic. At
the same time, there is little evidence of progress in implementing the Lisbon strategy of
a shift to high-technology industries, though it must be acknowledged that such a shift
is, for the EU as a whole, virtually a zero-sum game.
699

The smooth transition to the CAP is also problematic in the long run. The country has
not seriously engaged its inherent problem of lack of arable land and small and dispersed
holdings. As Volk, Rednak and Erjavec have observed, »the problem of a relatively poor
competitiveness of the sector has not yet been solved.« (VRE, 2007, p. 265)This may not
be an immediate issue but if reforms to the CAP are made reducing direct payments
coupled to production, farm incomes and competitiveness will become a serious problem
and increased pressure will be placed on agriculture and the food industry for faster and
more comprehensive structural adjustments. How this can be achieved and at the same
time retain the goal of maintaining rural values and institutions and population density
remains a daunting challenge.
700

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705

Miriam Goetz
Economic transformation of Slovenia-
gradual removal from gradualism?!

Introductionary Remarks: The special characteristic of the slovenian transition
The following paper is the abstract in English language of a much larger thesis in
German, submitted with the same title to the Economic Faculty of the Andrassy University/Budapest
in early summer 2008. The research work did not include only the available
relevant literature but was also based on fourteen interviews conducted in Ljubljana and
Maribor in April 2008 with partners who had served or are still employed in important
positions of the political administrative economic or academic fi eld. Most of them have
at some time or other actively participated or even infl uenced the process of Slovenia’s
transformation.
Even if the worldwide and therefore also Slovenia’s economic situation have changed
considerably since summer 2008, the results of the research work undertaken in spring
and summer 2008 still retain its value. Not only was the possible danger of change to a
defl ation process already hinted at in one interview or another, but the talks also touched
already on the possible dangers and pitfalls of management buy out with high debt levers.
Looking at past developments and achievements may furthermore give rise to new
ideas and practical recommendations or even solutions how to tackle or at least diminish
and delay the effects of today’s problems. In this way the results of research done, show
their value even in today’s fundamentally changed conditions.
The independent state of Slovenia exists already 17 Years. It is a member of the European
Union, but within international politics and the group of transformation countries
it still acts as a new performer. Due to its extraordinary socioeconomic and political
developments it will be worthwile to analyze it more precisely within the groups of
the transformation states. Slovenia managed to achieve a threefold change: Next to the
change from socialistic to market economy, Slovenia transformed its regional economy
into a national one and politically changed from a former part of the Socialistic Republic
of Yugoslavia into an independent State. It was furthermore within the fi rst
group of new EU Memberstates, accommodated by the EU in 2004. Slovenia had the
same targets as all the other transition-countries: The establishment of a good working
market economy embedded into a democratic state. But only Slovenia chose a gradual
transition approach. All the other transition countries decided for the neoliberal „Big-
Bang Stile“.
Slovenias inspiration for the gradual approach originated from the appendages of
the neoliberal “Washington Consensus”. 1 Yet already the very beginning of the Slovene
transition period turned out to be different from the other transition countries in various
1 The economist John Williamson chose the term of the „Washington Consensus“ for a Conference
in the year 1990 in Washingtom D.C. At this conference a group of latinamerican and carribean
exponents of international organisations and academics tried to evaluate the progress in the
economic policy of the latinamerican countries.
709

aspects. Slovenia started from a relatively higher development- level. 2 In addition, the
major parts of Slovenias exports had already been focussed on the western european
market during yugoslav history. Hence its level of economic internationalisation was already
very high. Being close to the western market forced the Slovenian companies to
fully meet international competition and to act contrary to the socialist economies in an
almost autonomous and independent manner. Slovenia was by far the most export oriented
part of former Yugoslavia. In comparison to other transition countries, the economic
set up of the former republic of Yugoslavia already contained some market elements.
The system of worker-self-management in former Yugoslavia and the reform efforts in
the eighties allowed a high level of autonomy. Kračun clarifi es the differences between
the Yugoslav and the eastern-european systems by using the term of 'semi-command
economy’ 3 . In Yugoslavia there was no form of a central planning and most decisions
concerning the semi-command economy were made autonomously. Furthermore Slovenia,
the young and independent country had to reach simultaneously economic transformation
and international recognition, and to strengthen the new won independency with
adequate institutions. The balkan-neighbourstates were involved in dramatic civilwars.
Hence it was important that international recognition should soon follow. „Although
direct Slovenian involvement in Yugoslav wars was short and of minimal intensity, indirect
effects strongly infl uenced its international political and economic situation.” 4 The
political changes in the region were another special characteristic of Slovenias transition.
Yugoslavias breakup, followed by the civil-wars happened at the expense of a big part of
Slovenias markets. It also hindered Slovenias direct approach to western markets. Business
with an internationally still not recognized country, in whose neighbourhood wars
were going on, was not attractive for many investors. Many companies did not survive
these conditions. Consequently the unemployment rose heavily in 1991 and 1992. 5 Last
but not least the absence of the IMF and other international institutions played a special
role in Slovenias road to transition: Slovenia received international recognition only half
a year after it became de facto independent. Only one year later membership was offered
by the worldbank and the IMF. But the fast success in the fi rst phase of macroeconomic
stabilisation distinguished Slovenia from the other transition-states. In spite of the mentioned
unfavourable circumstances, Slovenia was able to reach the internal changeover
in a respectively short period, some months after the monetary reform. 6 So the regional
2 Slovenia had been the most developed part of former Yugoslavia. Slovenias population
amounted to 8% of the total Yugoslavian population, but gained 16% of the GDP and 3% of exports
into the western markets. See .Kračun, Davorin (1991): Infl ation Model of a semicommand economy.
Economic modelling, 8, No.4, 512-527, here 512; In the future cited: Kračun, 1991.
3 See Kračun, 1991, 512.
4 Kračun, Davorin: Neoclassical and post Keynesian components of Slovenian transition. V:
Research proceedings (Global Conference on Business & Finance program & Proceedings, Vol 3, no
1) Hilo: The Institute for Business and Finance Research (IBFR), 2008, page 93-97
5 In the eighties unemployment rose up til 5,2% in 1991 and 8,3% percent in 1992. (Kračun,
previously unreleased paper: „Neoclassical and Postkeynesian Components of Slovenian Transition,
2008, 5. In Future cited: Kračun, 2008, Paper.
6 Dušan Mramor, professor at the faculty of economics in Ljubljana and former Slovenian Minister
of Finance gave an overview concerning Slovenias transition-path and underlined that Slovenia
always tried to keep its macroeconomic stability by using only limited FDI. Mramor thinks that
the national reservation towards high FDIs stems from Yugoslav hyperinfl ation during the 1980ies.
This created on the one hand an atmosphere of hostility towards foreign (portfolio-) investments

political situation and the development of the market-economy relations confi rmed the
national economic experts in their opinion, that further economic „shocks“ would rather
damage than help the economic development. In conclusion, it is clear that no other
transition was confronted with such a combination of special circumstances: Hence the
concept of the Slovenian transition-model had to be shaped differently.
The story and the results of Slovenias ultimate “metamorphosis” are not widely
known because the Slovenian transition model has until now not been toroughly examined
in economical reports. This article therefore tries to bridge the research-gap. It is
based on the available literature and seven single interviews of Slovenian experts who
were asked about the positive and negative results of Slovenias gradual transition-path
and the possibility of assigning this transition-model to other countries. Partially it will
therefore also be examined, whether all reform-measures were gradually accomplished
or whether a rather neoliberal approach, mixed with gradual elements led to Slovenias
success. In adition we shall scrutinize in which areas the largely successful model may
be incomplete and to which extent actual or future transition states can benefi t from
Slovenias transition-history.
I. TRANSITION- THEORETICAL BACKGROUND
The term „transition“ 7 has several meanings. One of these shall be cited here: „[Transition]
means the stadium of the breakdown of an old system/regime are set up, until
new rules of the new regime/system take place. In science transition also serves as a
synonym for the whole process of liberalisation, democratisation and consolidation.“ 8
Based on this defi nition and Slovenias example, we shall examine the differences between
neoliberal-transition and gradual transition-paths.
I.1. The Neoliberal Strategy
„In the context of several grasshopper-discussions 9 , the term of Neoliberalism is
widely used, but a closer defi nition of its concrete meaning is diffi cult!“ 10 says the German
economist Gerhard Willke. He concludes that „[…] neoliberalism seems to be a
but on the other hand it was responsible for Slovenias economic success. In: The Slovenia Times, 9.
November 2007, page 6/7, Author: Jernej Šmajdek, Column: Foreign Direct Investment.
7 Transition (lat. Transire= to go through).
8 Source: Manfred G. Schmidt- Wörterbuch zur Politik, Kröner Verlag, Stuttgart 1995
9 The term „grasshopper“ was fi rst employed by the German social democrat Franz Müntefering
in 2005. This animal-metaphora was used to depreciate international anonymous investors. He
compared their behaviour with grasshopper-plagues. The term was also used against other forms
of share ownerships such as hedgefonds.
The neoliberal marxism critic Bernhard Walpen for example challenges the existence of neoliberalism:
„[…]The neoliberalism cannot be summarized in only one defi nition. There is not one
neoliberalism, there are many which range from laissez-faire (Anarchy-capitalism) to long range
state interventionist approaches. (Bernhard Walpen (2000): Von Igeln und Hasen oder: Ein Blick
auf den Neoliberalismus. UTOPIE kreativ, 121/122 (November/Dezember 2000), 1066-1079
10 The neoliberal Marxismcritic Bernhard Walpen for example challenges the existence of the
neoliberalism: „[…]The neoliberalism cannot be summarized in only one defi nition. There is not
one neoliberalism, there are many which range from Laissez-faire (Anarchy-capitalism) till long
711

phantom: There are no supporters, only critics.” 11 But todays critics of neoliberalism (unwittingly)
pick up the very criticism, which had been voiced fi fty years ago by a group of
economists, called “neoliberal”. According to Andreas Renner 12 , todays critics therefore
run the risk of fi ghting a dummy.
In this paper, a transition-path will be defi ned as „neoliberal“, if its strategy tries to
accomplish the big transition-reforms (stabilization, privatisation, transformation of institutions)
simultaneously and within a short period of time. 13 (“Big-Bang Approach") 14
Probably the best known case of a neoliberal economic or “Big Bang”-approach is
the so called “Washington Consensus”. The neoliberal “Washington-consensus” model
was prevailing at the very beginning of the transition processes in central- and middleeastern
Europe. The “Washington Consensus” intended to highlight simple but universal
economic-political measures for reaching more macroeconomic stability, to abolish the
high protectionism of the latin-american countries and to benefi t from the potential of
growing world-trade and foreign capital. In the nineties of the past century, the overall
opinion was, that globalisation and the reforms would not only lead to high economic
growth but would also reduce poverty and level income distribution. 15 This idea was and
still is highly promoted by the IMF and the Worldbank. Marangos 16 sees this transitional
“Washington-Consensus- Big-Bang-Model” as a neoclassical construction. This shockmodel
is based on the neoclassic economic assumption, that individuals are strictly rational
and focus on boosting their own account. Prices are determined by perfect competition,
market and bargain. Neoclassical economy can be seen as an equilibrium, with
full employment and wage adjustment. Macroeconomic variables are the result of macroeconomic
relations. Savings determine investments, and- as long as the marketprocess
is not hampered, allocative and productive effi ciency will always be attained. 17 „Shock
therapy […]means a person, who while putting in his fi rst leg, cannot wait to put in his
second one.“ 18 Or in other words: “If a house is on fi re you do not tell the fi re brigade to
pour water slowly“. 19 At the very beginning of transitional processes, the idea of rapid di-
range state interventionist approaches. (Bernhard Walpen (2000): Von Igeln und Hasen oder: Ein
Blick auf den Neoliberalismus. UTOPIE kreativ, 121/122 (November/Dezember 2000), 1066-1079
11 Gerhard Willke (2003): Neoliberalismus, Campus, Frankfurt/M.
12 Andreas Renner (2000): Die zwei Neoliberalismen. Fragen der Freiheit, Heft 256, Okt./Dez.
2000, Hrsg. Seminar für freiheitliche Ordnung).
13 Of course, some reforms may take longer than others – for example, while it is possible to
stabilise the economy fairly quickly by means of an orthodox stabilisation program, privatisation
requires more time for preparation and fi nding the buyers. Most institutional changes need even
more time to be drafted, enacted and implemented. Orthodox approach doesn’t necessarily mean
that all reforms are fi nished on the same time.
14 Lipton D und Sachs J (1990) Creating a market economy in eastern europe: The case of Poland,
Brookings Papers on Economic Activity, No 1, 75, 147.
15 See. http://de.wikipedia.org/wiki/Washington_Consensus#cite_ref-0, 010.4.08, 13:30.
16 See. Marangos, John: Was shock-therapy really a Shock? In: Journal of economic Issues 27,
No.4, 2003, 943-966; here 943. In Future cited: Marangos, 2003.
17 See. Marangos, 2003, 944.
18 Woo, W. T. (1994): The art of reforming centrally planned economies, comparing China, Poland
and Russia, In: Journal of Comparative Economics Vol 18, No 3, June 276-308, here 281.
19 Aslund A (1994a): Lessons of the fi rst years of systematic change in eastern Europe, Journal
of Comparative Economics, Vol. 19, No.1, August, 22-38, hier 37.
712

versifi cation and immediate implementation of necessary reforms in order to establish a
free market economy, seemed to be very attractive for governments and fi nancing institutions
in middle eastern Europe. The fi rst and as a rule contemporaneously accomplished
neoliberal reforms began soon after the change of the regimes in mid-eastern Europe. If
reforms were delayed due to domestic reasons, the reformers achieved their plans often
via fast “pakage-solutions”. Poland was the fi rst country to enter this neoclassical path,
others followed. But some years later, it became clear that the theoretical premise of the
“Washington Consensus” was not working and that for political reasons a gradual approach
would have to be considered. 20 The Nobelprize winner Joseph E. Stiglitz opposed
the implementation of the Washington Consensus by saying that: „[…] these recommendations,
as far as they are transcript proper, are very useful [...] but the IMF sees these
guidelines more as an end in itself than as an aid for a more fair distributed and effective
growth.“ 21 He underlines that the IMF pursued its policy blindly although the economic
theory had already worked out important and useful alternatives. 22 Stiglitz sees the
„Washington-Consensus“-receipts as utopian constructs, „[…] which are especially for
the third-world-countries far away from reality and hence less relevant.” 23 In fact it got
obvious that countries like China, which did not follow the recommendations, showed a
good performance, whereas other countries in Africa and Latinamerica had lower growth
rates. Even the biggest advocates of shock-therapy criticise, that especially the neccessary
institutional changes need time. So real shock-therapy can’t be implemented. Marangos 24
adds that all economic actors fi rst need time for experimenting in order to achieve an effi
cient institutional structure at the end.
I.2.The Gradual Strategy
The debate between advocates and critics of the appropriate shape of a liberal transition-approach
goes on for already fi fteen years. 25 The concept of gradualism evolved
under neoliberal banner. The advocates of this approach wanted to distribute the social
costs of reforms over a longer period by means of compensations in order to prevent
social rioting, which could have led to political regression and fi nally to the end of the
reforms. The fundamental idea of the neoclassical gradual approach is therefore to establish
the necessary economic, political and ideological institutional reforms previous to
economic liberalisation. Without this base none of the neoclassical reforms would work.
Carrington 26 said that, “ […] this was because privatization, marketization and the introduction
of competition can not be contemplated in an economy reduced to barter.”
20 Especially in the early periods of worldwide transition-processes, the academic debate between
advocates of big-bang versus gradual approach was vigourous. Within the group of gradual-transition-promoters
we fi nd for example Murrell (1995). Pro Big-Bang-Transition are Roland
(2002), Dewatripont and Roland (1992a, 1992b).
21 See. Stiglitz, Joseph (2002): Die Schatten der Globalisierung. Bonn, 70.
22 See. Stiglitz, Joseph (2002): Die Schatten der Globalisierung. Bonn, 71.
23 See. Stiglitz, Joseph (2006): Die Chancen der Globalisierung. Bonn, 51.
24 See. Marangos, J. (2003): Was Shock Therapy really a shock? Journal of economic issues 27,
No.4 (2003): 943-966. here 963. In future cited: Marangos, 2003.
25 Still there is no unanimity between the agents of both approaches.
26 Carrington, S. (1992): The remonetisation of the Commonwealth of independent states
American Economic Review Papers and Proceedings 82(2): 22-26, here 24.
713

The implementation of reforms furthermore requires a minimum standard of life.
Otherwise the whole society and its economic well-being are endangered. Hence the
system has to advance via social consensus, which in turn stabilizes the system and
backs up private property rights. 27 This consensus must be determined by the volunteerprinciple
of free choice. 28 For Kornai it is therefore the target of such a gradual transition-process,
to reach simultaneously constant change in order to avoid transformational
recession 29 , „[…]and to overcome that shortagefl ation syndrome,” adds Kolodko. 30 Hence
Kornai requires the countries to choose a “preventive therapy.” 31 But according to some
transition-experts this „[...] is only possible by taking the longest road, or rebuilding the
boat in the open sea.” 32
A country which gears towards gradualism won’t initially stick to the neoclassical
package-solution, but will rather focus on a longer space of time. Generally speaking
reforms in a country leaning towards gradual-reform will always be slower in comparison
with a country using orthodox-liberal reforms. The analysis of the gradualistic approach
also shows that it is less characterised by its reform-deepness but rather by its reformcelerity.
Far reaching reforms over a longer time-period enable the agents to adjust their
behaviour to the new system by setting up and developing new knowledge. From the institutional
economic point of view gradualism seems to be justifi ed, because it underlines
the institutional change which is necessary to start an evolutionary process. 33
714
I.3. Gradualism as a Mixture of different approaches: Marangos’Thesis – The Post-
Keynesian Model
Marangos went even one step further: He analyzed the transition processes of several
transition countries and differentiated between the neoliberal classic shock-approach 34 ,
neoclassical gradualistic approach 35 , and the post-keynesian model 36 .
27 Murrel, P.(1995): The Transition according to Cambridge, Mass. Journal of Economic Literature
33 (1):164-178. Here 171.
28 See. Kornai, J. (1992b): The postsocialist transition and the state: Refl ections in the light of
Hungarian fi scal problems. The American Economic Review 82(2):1-21. Here 17. In future cited:
Kornai (1992b).
29 Kornai, J. (1993a): Transformational recession: A general phenomenon examined through
the example of Hungary’s development. Economic Appliquee 46(2):181-227. Here: 182, 189. In future
cited: Kornai (1993a). and Kornai, J. (1994): Transformational recession: The main causes.
Journal of Comparative Economics 19(1): 39-63. Here 41. In future cited: Kornai (1994).
30 Kolodko, G.W. (1993): Stabilization, recession and growth in a post-socialist economy.
MOCT-MOST: Economic Journal on Eastern Europe and the former Soviet Union1:3-38. Here 21.
31 Kornai, J. (1997a): Struggle and Hope: Essays on Stabilization and Reform in a Post Socialist
economy. Cheltnam: Edward Elgar Publishing Limited. In future cited: Kornai (1997a).
32 Elster, I. Offe, C. and Preuss K. (1997): Institutional Design in Post-Communist Societies:
Rebuilding the Ship at Sea. Cambridge: Cambridge University Press.
33 vgl. Kračun, Paper 2008, 2.
34 Marangos, John (2007): The shock therapy model of transition, International J. Economic
Policy in emerging Economies, Vol.1, Nr.1, 2007. In future cited: Marangos, 2007.
35 Marangos, John (2005a): A Political Economy Approach to the Neoclassical Gradualist Model
of Transition.“ Journal of economic surveys 19, N.2: 263-293;In future cited:Marangos, 2005a.
36 Marangos, John (2004): A Post-Keynesian Approach to the Transition Process“. Eastern Economic
Journal 30, No.3: 441-465; In Future cited: Marangos, 2004.

For a better Understanding of Marangos’ 37 theoretical classifi cation see the table below.
Table 1: Alternative Transition Policies
Policies Shock Therapy Neoclassical Post Keynesian
Gradualism
Price Liberalization Immediate price Gradual price Gradual price
liberalization liberalization liberalization
Stabilization No state intervention Gradual removal of Industrial policy and
sources of state regulation
intervention
Privatization Restitution, auctions Auctions Restitution, free distribuand
free distribution tion of vouchers, state
of vouchers financial intermediaries,
free vouchers and state
financial intermediaries
combined
Property Relations Minimum state Minimum state plus Majority private with
building institutions some social property
Institutions Formal and informal Formal institutions as Formal institutions as a
institutions, as a a product of state product of state action and
product of market forces action and informal informal as a product of
as a product of market forces
market forces
Monetary Policy Independent central Gradual establishment State-controlled central
Financial System bank and privately of independent central bank and privately—and
-owned banks. bank and gradual state-owned banks.
establishment of
privately-owned banks
International Trade Free trade, fully Payments Union Permanent Clearing
Foreign Aid convertible currency (temporary measure to Union
gradually establish
convertibility)
Conditional foreign Conditional foreign Conditional foreign
aid aid aid
Social Policy Safety net Gradual Safety net Welfare state
Source : Marangos, John, 2004,A Post-Keynesian Approach to the Transition Process, Eastern Economic Journal30, No
3,page 445.!
The analysis in this paper will be based on Marangos’ classifi cation. It will help us to
classify the Slovenian transition-policy-measures. According to Marangos and the majority
of analysts sees Slovenia is to be seen as a neoclassical gradualist-reform country. 38 In
real life we have to understand transitional gradualism however always as a kind of com-
37 See, Marangos, 2003, 2004 and 2005a.
38 See. Worldbank, 2004, 67-83.
715

promise between neoliberal and post-keynesian requests. Gradualism will always consist
of both elements. Slovenian experts in practice had to fi nd the right economic solution.
Furthermore they could not choose to follow only one theoretical transition-model.
716
II. SLOVENIAS TRANSITION
We will now briefl y examine Slovenias transition-policy and then classify the policymeasures
according to Marangos’ Scheme.
II.1.Slovenias Path to transition
Although already independent at the beginning of transition, Slovenia experienced
huge economic instabilities with respect to internal infl ation and external debts. The country
had to shoulder this burden from its Yugoslavian past. Political recognition was the precondition
for any successful measure to intensify the national efforts for an independent
fi nancial position and to sever the country from risks which were still connected with the
existing Yugoslavian rump. To reach this goal, the Slovenian standing on the international
capital-market had to be normalized in order to offer Slovenian companies good entry-conditions.
Mojmir Mrak and France Arhar 39 underline, that Slovenias admission to international
fi nance-institutions, especially the IMF, the Worldbank and the European Bank for
Development and Reconstruction (EBRD), was of eminent importance for the further Slovenian
development. At the same time the country was busy to reduce debts of former Yugoslavia
until 1996. 40 Jože Mencinger analyzing Slovenian policy measures and transitionefforts
before and after indepence 41 sees the tree main targets: (1) to stabilize the economy
in the period of transition, (2) to construct a market-oriented system and (3) prepare for
the gradual absorption of the economic policy-instruments via the new government. The
government was encouraged by the gradualists to control fi nancial activa according to the
companys output, to introduce price control-mechanisms and other control-instruments.
Hence the main idea was a re-regulation of the fi nancial system, re-regulation of the international
trade together with a re-regulation of state-owned companies. 42 In this context
Slovenia relied on two political strategies: The political control of macroeconomic stabilization
and at the same time internal and external liberalisation and structural institutional
reforms. This included the creation of new institutions, the privatisation of stateowned
economic goods, the reform of the company-sector, the fi nancial sector, public utility services,
the pensions and tax system, social aid and public administration. 43 Two types of stat-
39 Worldbank, 2004, Chapter 7, 99-113.
40 The Slovenian model of debt-cutting and distribution was confi rmed in May 2001 in the context
of the Agreement on Succession with all the other successor states of former Yugoslavia.
41 See. Worldbank, 2004, 67-83.
42 See. Kolodko, G.W. (1999b): Transition to a market economy and sustained growth. Implications
for the post-washington consensus. Communist and Post-communist studies 32(3): 233-261,
236. McKinnon, R.I. (1995c): Taxation, money and credit in the transition from central planning. In
P.B. Rana und N. Hamid (eds) From centrally planned to market economies: The Asian Approach.
New York: Oxford University Press, 73-106. Here 106.
43 Slovenias transition was developed in different key-documents: The three most important
are the „Strategy for Economic Development of Slovenia“, „ Approaching Europe- Growth, Competitiveness
and Integration, by Potočnik, Sejur und Štiblar 1995), the „Strategy of the Republic of

utes were introduced: Statutes guaranteeing the functioning of a normal market economy
(tax system and budget rules), and on the other hand those which were necessary for the
change (monetary policy and fi nancial sector). In contrast to the other transition-states
Slovenia was able to maintain a constant economic growth rate in the early transition-period
around 1993. 44 Between 1991 and 2004 drastic reforms were initiated and recession
was converted into growth. Thus currency- reform and currency- stabilization, followed
by import-liberalisation created good conditions for a declining infl ation and an increasing
economic growth. In the end, even increasing wages resulted in economic success. Despite
a slack in European economy and thanks to the unexpected domestic demand, Slovenias
economy stabilized. Along with the start of its EU-candidacy the economic growth-rates of
Slovenian increased highlighting the success of the Slovenian transition-policy-mix. 45
II.2.Classifi cation of Slovenias policy-measures according to Marangos’Scheme
Policy-measures regarding institutional reforms (establishment of a new state, democracy
and a fully fl edged market-economy) were implemented in neoclassic manner. In the
tax-sector where Slovenia tried to achieve a balanced budget, reforms also came in “neoclassical
outfi t” otherwise the money- policy and the fi nance-system were only partially determined
by neoclassical measures. Whilst the sudden currency-reform, the independent
central-bank, the fl exible rate of exchange and the fi xing of the convertability rate obviously
show the infl uence of neoclassic ideologies, the aim of improving competition-ability within
the state-controlled bank-rehabilitation-process appears to be rather neoclassic-gradual. 46
In some aspects, Slovenias gradual transition-path can also be explained by the previous
Yugoslavian type of socialist economy and break-up of the federation: The necessity of
fi rst establishing a new state endogenously slowed down and softened transition-policies.
Currency-reform and import-liberalisation basically followed neoclassical approaches, but
wage-policy and tolerance regarding infl ation were determined by many postkeynesian ideas.
With respect to privatisation we can monitor a pure post-keynesian approach. According
to the guidelines of gradual transition-policies the ownership-transformation favoured
free voucher-actions, fi nancial interference by the state and long procedures. Stabilisation
of the economy via gradual infl ation-reduction and minimum income were inspired from
post-keynesian ideas. 47 Apart from the measures mentioned here, the elements of postkeynesian
and neoclassic-gradual reforms were mostly mixed up. 48
Slovenia for the Accession to the European Union: Economic and Social Part“, by Mrak, Potočnik
und Rojec 1998 and the Strategy for economic development of Slovenia 2001-2006: Slovenia in the
new decade: Sustainability, ability to compete, Membership in the European Union“, by Šušteršič,
Rojec and Mrak 2001. For the reformprocess-perspective and the political guidelines the „Strategy
of the Republic of Slovenia for the Accession to the European Union: Economic and Social Part by
Mrak, Potočnik und Rojec, adopted in January 1998; (Worldbank, 2004, 83ff).
44 Kornai, Janos (1993): Transformational Recession: A general Phenomenon Examined through
the Example of Hungary’s Development. Economic- Appliquee; 46, No.2 (1993):181-227.
45 After 1993 also in European recession-periods, Slovenias economic growth-rates were always
around 3% and 5%. The lowest fi gure was indicated during the worldwide recession-period in
2003 at 2,3%. Kračun, Paper, 2008,20.
46 Marangos, 2005a, 286.
47 Marangos, 2004, 448.
48 The concrete description of Slovenian macroeconomic stabilization and liberalisation-instruments
can be found in The Worldbank Report, Sunny Side of the Alps and also Davorin Kračuns
717

718
II.3. Special factors favouring the gradual approach in Slovenia
Obviously Slovenias decisionmaking- process concerning its transformation-strategy
was infl uenced by its historical, economic and political position. Special attention in this
context will have to be paid to the role of Slovenian mentality and the EU-Access.
II.3.1 The Role of slovenian mentality:
Neoliberal and gradual approaches need a minimum of support from the population.
The support depends very much on the national mentality of a transition-country. An often
underestimated reason for choosing the gradual approach was the generally rather cautious
Slovenian behaviour towards economic reforms, accompanied by the tradition of a
consensus –mentality concerning every collective resolution. „The slovenian gradual way
was defenitely highly motivated and determined by the specifi c slovenian mentality […]
after 1945 suddenly we were the masters, […] since 1990 we were on the drivers seat. For
the fi rst time we are the ones who can decide independently.This is why in the anxious
times, we rapidly built up consensus and coherence, in order to conserve the own state“,
comments slovenian business-man Mirko Mušič. 49 He continued: “[...] The Slovene people
mostly think of themselves as a small population which has to be careful, not to be passed
over by bigger nations. It is a kind of love-hate relationship between Slovenia and the big
countries, and this behaviour has always been there [...] Also within Yugoslavia we felt like
a kind of a Junior-Partner, but [...] we also recognized our distinctiveness. There are very
small periods in Slovenian history in which Slovenia tried to copy other nations. We never
wanted to be someone else. The Slovenian mentality and attitude towards values and hard
work was always different from the other Balkan States. Hence the Slovenian gradual way
was very much caused by the specifi c Slovenian mentality.“ Janez Šušteršić 50 also sees
the importance of the slovenian mentality for choosing the gradual approach and sees the
slovene people as a mixture of different mentalities: „[…] German temper and the will to
work and earn money, a bit of mediteranean lightness and then the Slavic element, the
tendency to the emotions. In the last 15 Years we always underlined, that we are totally
different from the Balkan people. [...].“ In contrast Davorin Kračun 51 considers meaning of
mentality less dominant, but still important for choosing the gradual approach. Šušteršić
also highlights the cautious Slovene attitude towards foreign investors and privatisation:
“[...] Most of the Slovenian people do not want foreign investors because they think as long
as the companies stay in the national hand or remain state or national investors, they will
not harm them. Privatisation is not perfect, but it still can be controlled. The situation right
now means security and slow management.” 52 “[…] The gradualist approach is highly con-
Essays. These works primarily deal with reforms in price-liberalisation, privatisation, institutional
reforms, monetary policies, fi nance system, tax policy concerning international trade and foreign
aid and social policy as well as the reduced infl ation and continuing economic growth.
49 Dr. Mirko Mušič was born in Slovenia and worked as management consultant for the German
Siemens-Company for a long period. Today he is director of the Slovenian „Venture Consulting“-Company.
Interview 8.4.08, 19:30, Ljubljana. Future cited: Musič, Interview.
50 Janez Šušteršić, Professor for Economics, University of Primorska, Management Department,
Koper. Interview 1.4.08, 11:30, Ljubljana. Future cited: Šušteršić, Interview.
51 Davorin Kračun, Professor for Economics at the Faculty for Economics and Business, University
Maribor; Dean of Political Economy-Department; Interview, 31.3.08, 11:00, Maribor. Future
cited: Kračun, Interview.
52 See Šušteršić, Interview.

nected with the Slovenian mentality. You see it for example within in insurance sector. The
Slovene people are “hyperinsuranced”, confi rms France Križanić 53 .
Milan Cvikl 54 focuses on the role of the Slovenian mentality. He considers it to be
a crucial factor and decisive factor for establishing structural reforms: „[…] the quick
reformist approaches, they wanted to do in 1991/92, people would not accept it. So you
had to get it into a procedure somehow with a consensus builder, and then on the base
of that, you could do the gradualist approach. So the alternative to the chosen way of
approach would only be dictatorship. […] I think that nowadays looking back and considering
the actual state of Slovenia, we did the right thing. You can prove it with the data
on Slovenias Euro introduction. Despite the fact that we were really not well treated, we
were not the ‘guy in the class’. You know, we said that we do not follow the Washington
Consensus, you know the general approach of how to stabilize and build institutions. So
in that context I think it was a right decision.”
II.3.2. EU-Accession
The target to enter EU was an important factor in the transition process that requested
gradual and non-gradual policy-measures. Quite early the Slovenian public recognized
transition and EU-accession as two procedures supporting each other. The special feature
of the EU-access was its “carrots and stick”-character: The accession process helped
the Slovenian government to carry out necessary transition-measures, which normally
would have provoked serious political resistance. We will see that the EU-accession process
sometimes altered gradually initiated reforms into neoliberal reforms.
In Slovenia the EU-integration was perceived as strengthening the transition-process
and not as a single target. Kračun highlights the fact that already from the very fi rst day
of the transition-measures, the Slovenians were eager to accede to the EU. Furthermore
he noted that the EU-accession-process contained many gradual elements which suited
the Slovenian transition-approach: „[…] I think that, when we were in the early process
with negotiations it was very positive. We always had lobbies who wanted to change
some regulations, and in order to help them (since we had to reach the Acquis Communautaire)
we only had to fi x regulations. What we had to do, I think it was good for
our domestic purposes. It was easier to manage domestic controversies, in order to say:
It is said by EU, there is no discussion about that. I think that the whole process of joining
EU was part of the gradualist reform […].” 55 Cvikl agrees on the gradual character
of the EU-accession instruments. „[…] EU-directives are sometimes really gradual, and
second, accession to Europe was equal to transition. Gradual transition to the Acquis
Communautaire was actually what we really wanted to do, appropriate transformation
to the Aquis Communautaire […].” 56 Indeed EU-integration was the most natural and
optimal way to shape and encourage the future-transition-process. The accession-instruments
were often gradual but at the same time the country was also forced to speed up
53 France Križanič, Head of EIPF: Ekonomski Institut Pravne Fakultete; Interview, 2.4.08, 10:00,
Ljubljana. Future cited: Križanič, Interview.
54 Milan Cvikl, former deputy and member the slovenian national assembly, former fi nancial
director of Nova Ljubljanska Banka, former State-Secretary for public fi nances, former economist
for central- and easterneurope at the Worldbank. Interview 3.4.08, 13:00, Ljubljana; Future cited:
Cvikl, Interview.
55 Kračun, Interview.
56 Cvikl, Interview.
719

structural reforms in order to competitive within a far bigger competable market and act
within a far more restrictive economic framework. 57 The economic costs of lower competitiveness
would increase especially after entering the common market and after adapting
the common currency. Entering the EU therefore meant to speed up reforms. Hence just
as often a further gradual approach was impossible. Mitja Gaspari 58 underlines that by
the existing access-option some radical policy-measures could be taken, which- under
normal circumstances- could have never been realized. „There was a common agreement
between the government and the monetary authority, to get into the EU and to get the
Euro as fast as possible. My belief was that we need a “straight jacket” in order to cope
with the high infl ation. We needed a framework which would exert positive pressure on
our local institutions.” 59
720
III. 2008- RETROSPECTIVE ON 20 YEARS OF TRANSITION
Looking back on the transition-process it will proove to be useful to compare the
results in gradual and non-gradual reformed sectors. The result of this analysis might
help to assess the comparative advantages of different approaches to specifi c problems
on sectors.
In order to illustrate the deep impact of gradualism even in the current Slovenian
economy, two case-studies about the gradual- reformed private-sector are included. It
was and is not the purpose of this paper however to give an exhaustive evaluation of the
gradual transition-approach.
III.1. Development of neoclassic-gradual changes- adaption of law-standard and establishment
of democracy
The results of gradual adaption of law-standards and the reaching of democratic targets,
can be evaluated on the base of the Bertelsmann Transformationsindex (BTI) 60 2008. 61
This Index classifi es transition-states a) according to the status-index which analyzes the
development-level of a country on its way towards democracy and market-economy and
b) the management index which measures the tax-achievements of politicians. 62 In the
status index ranking 63 we fi nd the Czech Republic on the fi rst, Slovenia on the second
57 Šušteršič, 2008, Paper, 15.
58 Mitja Gaspari, former Chief of the Central Bank of Slovenia and former Minister of Finances.
Interview 7.4.08, 10:00, Ljubljana. Future cited: Gaspari, Interview.
59 Gaspari, Interview.
60 Bertelsman Transformationsindex 2008: Politische Gestaltung im internationalen Vergleich,
1-10. Future cited: BTI, 2008.
61 The BTI focusses on the targets of rule of law, democracy and social oriented market economy
and thereby analyzes and compares 125 countries and their transition-paths worldwide. The
BTI comprehends all states with more than 2 Million inhabitants plus Bahrain, Botswane, Estonia,
Mauritius and Montenegro as very special cases, which were and are at the very beginning of consolidated
marketeconomic democracies. BTI, 2008, 4.
62 Period of examination contains Years 2005 till 2007.
63 Status Index: This Index is the average of the results of the political and economic transformation.
The average is generated with precise, unrounded values of the two dimensions. BTI,2008, 1ff.

and Estonia on the third rank. On the base of the constantly high Slovenian data level 64 it
can be assumed, that the classical gradual reform-measures in this part of transition led
to positive results. Furthermore there is no big discrepancy between the Slovenian social
economic growth and the social balance. 65 In the management index Slovenia, Lithuania
and Tschech Republic have no leading positions anymore. They were passed by Uruguay,
Croatia, Southern-Africa and Latvia. The setback of Slovenia 66 in this fi eld demonstrates,
that also successful reform-states can show declining tendencies- due to reform-tiredness
or declining consensus.
III.2. Gradual reform of state- banks and capital markets
The “implementation-gap”in sectors in which institutions already existed, but were
weak to act and to accomplish reforms is particularly apparent in the fi nancial sector. Of
course it is true that the state- controlled rehabilitation process of banks, which was carried
out gradually from 1992 till 1996, clearly shows results. In the recent past there was
additional progress with regard to the privatisation-process and the development of the
capitalmarket. In this context we have to mention the limited privatisation of the national
NLB-Bank 67 , where 34% were bought by the Belgian KBC-Bank. But in 2006 the Belgian
attempt to increase their shares over 50% failed. 68 The Belgians then lost interest in their
share. In important banks the Slovenian state goes on to be the major shareholder. Thus
this sector runs the risk that foreign investors might not move in anymore. Experts note
in this context that chances to establish the capital market as a core-element in the Slovenian
economy 69 are diminishing.
III.3. Effects of postkeynesian- gradual changes with respect to infl ation
Infl ation in Slovenia might partially also be a result of the slow reform-development.
In the income sector the rapidly increasing wages created infl ationary pressures. Whereas
the advocates of the gradualistic approach interprete the high infl ation as an inherent
heritage of former Yugoslavia, the critics see the infl ation as a clear result of the gradual
64 Criteria and data of Slovenias political participation:
Statehood: 9,8; Political participation:9,8; state of law;9,8; stability of democratic institutions:10,0;
political and social integration: 9,3; Result of political transformation:9,70; Criteria for
economic Transition are: Socioeconomic level of development:10,0; Market- and competition order:9,0;
Currency- and Pricestability: 10,0; private property: 9,5; social order 9,5; capacity of national
economy: 8.0; Sustainability:9,0; Result of economic Transformation:9,29.
65 The index of economic growth is about 10,0, the index of social growth about 9,5 points.
BTI, 2008, 6.
66 Within the management-ranking Slovenia is at the 12. Rank (6,83) and in comparison with
the previous year lost –0,58 Points. BTI, 2008, 5.
67 NLB=Nationala Ljubljanska Banka.
68 Slovenias President Danilo Türk said in an interview on 10.9.07 in STA: „We sold only 30%
of the bank as to obviate that a foreign bank would not treat the slovenian companies as good as a
national one, this is the reason why we sell the NLB only decelerated.“
Danilo Türk, born on 19.February 1952 in Maribor, Yugoslavia is a slovenian Jurist, Diplomat
und Politician. Since 23. December 2007 he is Slovenias president. vgl. http://de.wikipedia.org/
wiki/Danilo_T%C3%BCrk, dated: 12.05.08, 14:00.
69 Worldbank, 2004, 333ff.
721

strategy. The majority of the interviewed experts see the source of the actual high infl ation
in the gradual, slow restructuration process. Križanić suggests that „ […] The Infl ation
was caused by two factors: The liberalisation effects and the infl ow of new Euro.
This caused a lot of demands for enterprises, and now they can set their prices on the
market. The food market is a good example, the clothes and shoes sector will follow. But
my bigger fear now is not the infl ation. It is more the question, what will happen after
the infl ation - the defl ation process will start and cause a big job loss.” 70 But he does not
consider the 6,5% Infl ation (together with 6% economic growth) as an alarming fi gure. He
adds: „[…] the Germans have about 3% infl ation and 1,9% growth. So all in all we are a bit
better off or lets say we are equal!” Kračun does not see the gradual transition as source
of the high infl ation. He names another three factors: „ […]The weight of food and energy
in the basket for calculating the consumer prices index is higher. In Germany it is 15%,
in Slovenia it is 30%. Second, we have a less competitive market. We struggle against monopolies
but not successfully enough. The main fault was done through this government
in 2005, when it arranged that deal between Mercator and Pivovarna Laško. It was a signifi
cant step towards monopolisation. Since we are a small market, we are more vulnerable
to infl ation. The third reason for infl ation is outside Slovenia and is related to world
market instabilities.” 71 In contrast Mojmir Mrak 72 underlines, that the Slovene population
already managed to overcome different infl ation-periods. The reasons for these downfalls
were always created by external sources, by the public and politicians. Thus the
current diffi culties could have been avoided. „[…]with the surpluses of the years before.
We could have helped other policies, balancing the payments. But instead of doing this,
the responsible persons borrowed the surplus for fi nancing the highway investments.
This has led to an overheating in the economy. If the current defi cit was 2%, this would
be o.k. but now it is 5%. So even the most blind person will see that something wrong is
going on. Sure we are in the EU and there is no danger of a big fi nance crisis anymore.
But despite that, we still have the responsibility for the actual crisis. Our problem now
is the rise of the salaries. The infl ation grows, but the wages do not, they are fl at. There
is also the election this year. All over the country there are requests for higher salaries.
If the salaries increase more than the countries productivity, we are facing the Portugal
scenario in the near future. In the longer term this is really dangerous, because we do not
have the possibility of changing the exchange rate of our currency anymore, and we do
not have a big enough increase in competitiveness.” 73
Musič sees the Slovenian mentality and the behaviour with regard to curt goods as
decisive factors responsible for infl ation: „I really do not understand how we managed
to go down to 3% for entering the EURO currency. This is why the 6,9% also takes me
by surprise. It was unimaginable for me whether we would ever enter the EU. Now the
public thinks that the wages have to increase parallel to the infl ation. Even the entrepreneurs
want to raise the wages by 5% in order to prevent troubles with their employees.
This attitude is a never ending story. It does not matter whether we are competitive. We
70 Križanić, Interview.
71 “We have a similar situation like in Germany, trade unions. We see 6% infl ation. Salaries and
wages rise like in Germany. It is election year and the government must pay. I am scared that the
government will pay a too high price, but this is the normal political cycle.” Kračun, Interview.
72 Mojmir Mrak, Professor for Economics, University Ljubljana, Finances-Department, Interview
9.4.08, 16:00, Ljubljana. Future cited: Mrak, Interview.
73 Mrak, Interview.
722

have the right to ask for more.“ 74 Mrak suggests that the origins of the high grocery-prices
for example do not stem from gradual transition but from the defi cit spending approachstrategy:
„[…] Slovenia was the only country, after whose accession to the EURO- Zone
prices went down, due to the fact that our agriculture was more developed than in other
countries.” 75 Gaspari adds: „[…] The infl ation doubled in Europe, and it tribbled in Slovenia.
There are no reasons for this in Slovenia. In the Euro-Area, we lost the money
sovereignity and instruments to deal with the exchange rate policy, […] We did fi nancing
instead of restructuring in the last two years. It is not balanced. We pushed up growth
but not doing our job with the fi scal or wage policy. These are the two only policies that
remain in our hands. But there we are not fl exible enough. We are loosing competetiveness.
The enterprises do not produce enough and then fi re the people.” 76
III.4. Postkeynesian reforms in the social sector
Similar to other aging European societies Slovenia is concerned about the problems
in the state-insurance sector. Originally this sector was consciously reformed in a gradualistic
way. Today the question arises whether a more radical or a further gradual privatisation
of the social sector would give a good return. Križanić in this context again refers
to the role of Slovenian mentality: „Concerning the Slovenian mentality, you cannot just
do a kind of shock therapy. The society would not bear that!” 77 It can also be argued
however, that the Slovenes already proved their ability to cope with such shocks in the
fi rst period of transition. Professor Križanić counters: „If you are under pressure and you
must survive, you can handle it, […] yet you must not push the shock-elements too far
[…].” 78 Kračun confi rms this position and also refers to the specifi c Slovenian mentality: „
[…] It is a matter of decision, how to address it. Slovenian people are rather conservative.
They do not take to much risk. So each reform should consider a minimum of security.
Our transformation also parted from a widely secured society, towards a society with
capitalistic uncertainty. 79 We nowadays live with more risks, than 20 year ago […] now
the political risks are lower. We are part of EU and NATO, but we now have the risks of
every day life. If the reform will raise the risks of everyday life, the governing parties will
not be popular. People would rather not go too far in their standard of living but wish to
be safe. Politically in the last years the most sympathetic idea is the fl exicurity-system. It
is a system with a high degree of government infl uence and high taxation. But I think that
74 Mušič, Interview.
75 Mrak, Interview.
76 Gaspari, Interview.
77 Križanić, Interview.
78 Križanić, Interview.
79 „In the 80ties we had a rather high standard of living compared to another Former Yugoslavian
Countries, but it was a very high rate of virtual security, you were practically safe in your job,
couldn’t lose your job, rather safe in getting good conditions for retirement, you did not need to
care for your pension, health-system was completely free, you only had to fi nd a doctor. The problem
was, if you did not know a doctor, if you had no links you had to wait. It worked, it was a full
insured system, now you must compete for job, you can loose your job, and also retirement, nowadays
you do not get such a retirement as it was before independency. The latest rate between wage
and pension is 1:65, so you are going down, but the retirement age is going up. Health systems, we
have a privatised system now, you have to do a contract with health insurances where there is the
possibility, that one day, they tell you, that they do not accept you anymore.” (Kračun, Interview)
723

Slovenia in general is ready to accept a rather high level of taxation if the risk is lower. I
would say that risk today is much greater economically than it was before and I do not
think that there is much space left for taking new room. Also with respect to the fl exibility
of labour market, I think the main challenge is to shrink bureaucracy, not to put the
labour force into a more risky situation […].” 80 Whilst Kračun favours clearly the ongoing
gradual reforms in the social sector, Gaspari calls for straight radical reforms: „ […] a stable
legal environment: wages 60%, prices 80% of the EU average. We need to renew those
because otherwise people will ask: What is the purpose of this a reform-agenda if we are
lagging that much behind. We need a better process- it is a manner of cultural change.
The state is not responsible for everything. It is productive cohesion, […] the pay-as-you
go system in health is not good, we need to do some classifi cation of system. […] the
productivity of the economy goes to structural reforms not to pensions. In the last years,
the idea was to just accumulate everything as public shareholding, and all the proceeds
in good management should go to health system.” 81
The reform-delay especially in the public services and companies hampered the advancement
of price-competition in the private service-sector as well as in the goods producing
sector. In the tradeable sector the labor cost effi ciency increased faster by reduction
of staff than in the non-tradeable sector in which the relative growth of production
could hardly compensate for the higher prices in services and labour. 82 This led to structural
infl ationary pressure, refl ected in the higher prices. But this pressure had not occured
if the reforms would have been implemented faster. After 2001 the restruction was
intensifi ed. This was interpretated as the result of the government changeover and the
changed economic surroundings. However the growth of innovative high-tech products
and structural reforms was not stimulated, but by the incomplete structural measures
only the position of the active exporters was strengthened. Only exports were improved
via strengthening of the old system and the acting agents within this system. The reforms
did not enough for reforming the weak parts of the system.
724
III.5. Postkeynesian reforms in the fi eld of privatisation
As mentioned above we will specifi cally examine the impact of (postkeynesian)-gradual
reforms with respect to the privatisation-process in Slovenia. Two two case-studies
will be part of this analysis.
A more intensive study of the privatization process will be particularly rewarding
because in no other fi eld the merits, shortcomings and continuity consequences of the
methods and procedure closer for the economic transformation of Slovenia can be seen
so clearly. Under these aspects we shall have to deal in the later paragraphs of this part of
the study in particular with the intransparency of the privatisation process in Slovenia,
the role of “internal potentials” and the consequence that Slovenia was in the end confronted
with the necessity to combat against national monopols at least in some fi elds
of its economy. In contrast to the other transition-states, gradual and postkeynesian elements
were mixed up in the privatisation process. The chosen policy-mix and the results
of this mixture give an ambivalent impression. In the context of the strategic restructur-
80 Kračun, Interview.
81 Gaspari, Interview.
82 The labour-costs for the economy as a whole increased from 1995 till 2001 about 11,1%, in the
production-part around 16, 8% and in the other sectors around 9,2%. Šušteršič, Paper, 15/16.

ing of Slovenian companies two factors stick out: A) An inadequate institutional structure
which is refl ected in the underdeveloped capital-market and in a defi cient wage-allocation.
This led to a labour-market with centrally controlled minimum wages and a
restrictive employment-law, slow labour-adaption and increasing discrepancies between
goods- and service-sector. B) A group of leading, international Slovenian companies put
together internal ressources. In the course of their investment-activities they could fall
back on these internal funds, so they were no longer dependent on external help or advice.
Šusteršić says, that „[…] there are only two defi ciencies of the mentality: People still
believe, that the state will care for them. The other obstacle is the privatisation. Most of
the Slovene people do not want foreign investors because they think as long as the companies
stay in national hands, the state or national investors will not harm them. The privatisation
is not perfect. But it still can be controlled. The situation right now means security
and slow management.” 83 Another consequence of the gradual privatisation-process
is refl ected in Slovenias current low level of Foreign Direct Investments (FDI). Different
data and analysis made by the Worldbank show that these Foreign Direct Investments
contributed in a positive and relevant manner to the restruction of the Slovenian company-sector
and to the ongoing privatisation and consolidation of property. 84
With respect to the Slovenian economic trends 2007/08 the German federal employment
offi ce 85 comments that, although the government had tried to strengthen the privatisation,
the state still is engaged directly in many companies via funds. 86 Not only the
politicians, but also the public seem to differ about the question of privatisation: „Sell
off Slovenia” critizised the leftist newspaper Mladina and with reference to the privatisation-strategy
it adds: „ […] As the government conducts the privatisation in a hurry and
very conspirative, we run the risk that in the long run, the proceeds will be less than
the optimal.“ 87 A referendum in autumn 2007 inhibited the preparation for preparation
of the biggest national insurance-company Triglav. Mušič comments: „I believe for the
Slovenian people it is less important wether the companies are state-owned or private
property. For them it is more important who are the individuals behind the companies.
When Janša 88 came to power, he did not have enough good people. The socialists were in
control for many years. All economic structures had been occupied only by these people.
In the majority of the important companies there were no opposition-advocates. Hence
he had to win people over who could assume the leadership in these companies. In the
aftermath in every infl uential company the board of management was swapped. And
once again the whole procedure was set up under the principle: It is not important what
you can do. The main thing is that you are on the right side. Because of this it is also very
83 Šušteršić, Interview.
84 See.Worldbank, 2004, 224ff.
85 See.Wirtschaftstrends Slowenien, Jahreswechsel 2007/08, edited by the
Bundesagentur für Außenwirtschaft, Servicestelle des Bundesministeriums für Wirtschaft und
Technologie.
86 49% of Telekom Slovenia should have been privatised. Hrvatski Telekom and Magyar Tel-
ekom were potential bidders.
87 Mladina, 20.9.2007. In: STA-Slovenian Press Agency, http://www.sta.si/en/index.php?s=a&;
abgerufen am 20.09.07, 12:35.
88 Janez Janša (Offi cial Ivan Janša, born on 17. September 1958 in Ljubljana) since 1995
chairman of the Slovenian Democratic Party (SDS). In November 2004 he was elected Slovenian
Primeminister. http://de.wikipedia.org/wiki/Janez_Jan%C5%A1a, 12.05.08, 14:45.
725

diffi cult to muckrake as it is diffi cult to detect it. In Slovenia the determining factor is not
to gain profi t, but the composition of directors is crucial. In many cases this composition
is just ridiculous. The majority of governing bodies often does not even know how to
manage a company and how to embed it into world economy. Mostly they are lobbyists.
The property-owner is less important.” 89
III.5.1. Case-Study: Privatisation measures by KAD and SOD
KAD 90 and SOD 91 were both created in the Slovenian privatisation-process and were
established in 1996 (KAD) respectively 1993 (SOD). 92 Both Funds were set up as joint
stock-companies with the state as the only proprietor. Within the scope of the envisioned
privatisation process the aim was to reduce the substantial role of KAD and SOD in the
national economy. In July 2005 the government promised to retire from the economy
within 30 months and to sell the remaining KAD and SOD stocks to other companies. In
addition to this investment strategy public companies should have been transformed not
by a strategic investor but by a portfolio-manager. In the big public companies the stocks
had to be reduced under 10% of the portfolio-investment. According to the strategy these
sellings were to happen within 24 months via public anouncements or biddings, or exceptionally
by sale to a strategic investor. Due to unknown reasons, the government did
not set up a time-table for stock-sale of smaller national and succesfull companies. 93 Both
funds possessed strategic stocks in many companies, hence they were able to control the
operations and decisions of the different managers and in a parallel manner strengthened
the national interference. External and internal experts earmarked this interference
as one of the weak points in the Slovenian economy. Since the beginning of 2007 KAD
and SOD made eight announcements for public bidding of the stocks. 94 But all in all
89 Mušič, Interview. He added: „Another example is DARS, responsible for highway construction.
Following an expert statement the seven directors were handpicked and within every decision
was strictly supervised. Because of the highway construction, the DARS Company was heavily
indebted. But the Slovenian state acted as a guarantor and this made it possible that the company
could borrow. The result is that the state intervened and incurred so many debts, that the projected
railway-modernisation is current not possible anymore.
90 The pensionfond KAD is responsible for possible pension-defi cits, which are structured in a
pay-as you go System. KAD also manages four other pension-insurancy companies.
91 SOD manages the portfolio for compensations of denationalisation victims such as assigned
property, condemnation, investments in public communication and postwar-disadvantages.
92 “The Slovenia Times”, 7. September 2007. http://www.sloveniatimes.com/en/inside.
cp2?cid=ED4C6575-3589-840B-A072-1B6760015E2E&linkid=newsList, 2.4.08, 15:00.
93 Companies like Nova Ljubljanska Banka, Nova Kreditna Banka Maribor, Abanka and Banka
Celje, the national Airline Adria Airways, the airport Aerodrom Ljubljana, the Casinos in Ljubljana,
Maribor and Portoroz, the Game- and tourismcompany Hit, the pharmaceutic Company Krka, the
harbour logistic- company Luka Koper, the energy company Petrol, the insurance company Sava,
the national telecommunication company Telekom Slovenije and the Insurance Company Zavarovalnica
Triglav counted among these. “The Slovenia Times”, 7. September 2007, http://www.sloveniatimes.com/en/inside.cp2?cid=ED4C6575-3589-840B-A072-1B6760015E2E&linkid=newsList,
12.4.08,
15:00.
94 Previously both Funds had trimmed of their shares progressively, 1999 KAD controlled
over 1300 Companys, in 2006 there were only 1205 and in 2007 the Fond consists of only 70
companys. “The Slovenia Times”, 7. September 2007, http://www.sloveniatimes.com/en/inside.
cp2?cid=ED4C6575-3589-840B-A072-1B6760015E2E&linkid=newsList, 12.4.08, 15:00. Since 2003
the fond reduced the number of its investments about more than a half. From 2005 till 2006 SOD
726

there were 262 companys to sell. 95 Most of the stocks were sold to national entrepreneurs,
some of them closely bonded to the management of similar companies. 96
Obviously the intended, „real“ privatisation of KAD and SOD stocks did not take
place.
III.5.2. Case Study: Mercator Affair- vertical and horizontal monopolies
The gradual property-transformation as a result of the Slovenian privatisation-policy
ended in an extreme monopolisation of the food-sector: The state-owned Agencies
KAD and SOD posessed 30% of the biggest national supermarket-company Mercator.
These shares were sold to the most infl uential stock owners Istrabenz and the Beer- and
drinkproducer Pivovarna Laško. Already the award procedure showed big defi cits, as
the consequences and signifi cance of this sale were (knowingly or unknowingly) not
considered. 97 At the end of the transfer Infond Holding and Pivovarna Lasko controlled
65% of Mercator. Kračun comments: „The ruling government in 2005 made a disaster
with privatisation. It made a deal with Mercator in 2005, a lobbyist government solution
[…] this was sponsored by the Prime Minister. The original intention was, to push
Mercator and let it grow into a big market, where Slovenian farmers could sell their
products, and Mercator could compete with our products on the European market. But
now the fi ght is between them. The outcome was a monopoly in the food sector in Slovenia,
and the government did not get that much from Mercator as it should have […]
Laško Pivo has been forced to give Mercator away again. But they try to hand it over to
another company controlled by them. The government did manage to supervise at least
two alimentaries, bread and milk. It is obviously a cartel, with a vertical structure 98 […]
They are using the strategy of ‘predate prices for beer’. Most of the Slovenian people
drink Slovenian beer, as this is much cheaper than foreign beer from Belgium or Austria.
The Belgians and Austrians cannot enter a market, ruled by such dumping prices.”
99 Some critics assume that with this deal, Prime Minister Janša wanted to prevent
further negative reports by the nationwide biggest newspaper Mladina, owned by the
Pivovarna-Laško-Group, because after the transfer of the Mercator-Shares to Pivovarna
bisected ist portfolio and today the Fond holds only 70 companys. See: “The Slovenia Times”, 7.
September 2007, http://www.sloveniatimes.com/en/inside.cp2?cid=ED4C6575-3589-840B-A072-
1B6760015E2E&linkid=newsList, 12.4.08, 15:00.
95 The most important sellings, which were realized until today concen the construction company
Primorje, food trade Merkur, the grocery-company Mlinotest, the Media Delo and Dnevnik
and the shipping company Splošna plovba.
96 Only 30% of the national shipping company Splosna plovba was sold to the german ocean
carrier Peter Doehle. “The Slovenia Times”, 7. September 2007, http://www.sloveniatimes.com/en/
inside.cp2?cid=ED4C6575-3589-840B-A072-1B6760015E2E&linkid=newsList00.
97 The fi nance-companys Infond Holding and Fidina, the construction-company CPM and the
manufacturing company Koto are shareholders of the Pivovarna Company. They bought further
106,585 shares and boosted their common contingent up to 55%. According to the Daily Finance, the
same offer by Triglav, the Consulting and Development company Electa and the Retailer Engrotus
had been rejected. STA Casel Lasko Pivo: 13.3.08, Four Lasko-Bondholders exalt shares on to 55%.
98 The Mercator-Disposal is a good example for detecting the structure of vertical and horizontal
Monopoly: The Pivovarna-Company is primarily food-Producer, but after the acquisition of
Meractor the majority shareholder Pivovarna Lasko who is a foof producer himself can now also
set the prices for its products.
99 Kračun, Interview.
727

the headlines concerning the government suddenly improved. Hence opposition politicians
suggest that the Prime Minister had run the whole operation for his own purpose.
He acknowledged however that this sale had been a mistake. It had strengthened the
national monopolies including media. Powerfully and eloquent he therefore promised
to fi ght against the Tycoons. 100
Because of the political repercussions of the “Mercator-Affair” a fact-fi nding committee
was installed by the opposition in parliament in November 2005. This comission had
to check 83 sales made by SOD and KAD, including the mercator-deal. According to the
fact-fi nding comission the Mercator share-sale in 2005 had been implemented hastily 101
and on the base of an expired company appraisal. 102 Marjan Drofenik, member of the
peoples party (SLS) argued that the sale of Slovenian companies should be for the public
benefi t. Following Drofenik the undertaken disposal to the Mercator-Group had been
done in order to protect the national food industry as well as the national producers and
to refi ll the tills of the two state-owned funds that had previously owned the shares. 103
In contrast a member of the opositional liberal democrats criticized that via selling the
Mercator-Group the government only tried to to swap the heads of SOD and KAD management.
104 All in all the political reactions however remain quite cautious. The national
assembly adopted however a new act to prevent restraints of competition. 105
III.5.3. Intransparent Privatisation
Intransparency of privatisation, the dominant role of the state and the state-owned
funds like KAD and SOD became apparent in the Mercator sale but also within the privatisationstrategy
of the state owned insurance-company Zavarovalnica Triglav. The Management
of Triglav, Slovenias biggest national Insurance-Company, stated that fi rst actions
werde undertaken to sell state-shares in public and hence the company would comply
100 The Prime Minister addressed Šrot, owner of the brewery Pivovarna Laško, who had consciously
elevated the food-prices, critisized the government for the high infl ation and who controls
infl uential media such as Delo. STA 12.12.07. http://www.sta.si/en/vest.php?s=a&id=1241388,
12.04.08, 14:45. Future cited: STA, 12.12.07.
101 Earnings per share were 160 Euro. STA, 12.12.07.
102 Opposition members said that this disposal will mean a huge burden fur Slovenia. They
called for a revision of the Mercator-sale and conviction of the responsibles. Members of the coalition-parties
in the comission said that the Mercator-Disposal in the middle of 2005 with 30% shares
to Pivovarna Laško and Holding Istrabenz had been with a fair price and legal. The decision was
taken with 45:11 votes against the move of oposition. STA, Reactions on Mercator Affair, 1.4.08:
Parlament rejects Mercator-accusal.
103 See: STA, 17.9.2007. http://www.sta.si/en/vest.php?s=a&id=1192291, 12.04.08, 14:50. Future
cited: STA, 17.9.07.
104 The reshuffl e was proposed for middle of December 2007 and the government was prompted
to comment on it within 30 days. The government did not comply. STA, 27.2.08, http://www.sta.
si/en/vest.php?s=a&id=1262145, 13.04.08, 15:00. Future cited:STA, 27.2.08.
105 According to the appraisal the competition-surveillant should control the vested rights and
the disposal of offi ces. Until now only one director surveilled all operations. In future every act will
be controlled by three panel-Members. Furthermore ahead of any acquisition companies have to ask
especially if their marketshare is more than 60%. The punishments for offenses are also enhanced.
Until now the maximum was about 375,000 Euros. It was boosted to 10% of the annual turnover.
Vgl. STA, 1.4.08; http://www.sta.si/en/vest.php?s=a&id=1272223, 12.4.08, 12:30.
728

with the new government-rule regarding the sale of stateowned companys. 106 Thus 35% of
Triglav-shares should have been sold to 750,000 insurance-owners. But then the government
decided to offer 35% directly to one bidder. Following an article of STA 107 , natural
individuals would not have been able to buy a Triglav-share. 108 By referendum the privatisation-plans
were and stopped the government is now unable to intervene in this case. 109
Similiar doubtful moves could be seen in the buyout of the Slowenije Telekom and
the second largest Slovenian bank NKBM. The ministry of fi nance refused to publish
documents which were connected to privatisation. 110 Prime Minister Janez Janša disregarded
opposition accusations, according to which the steel-company SIJ had been sold
to the Russian Konglomerat Koks below market price. 111 Jozef Horvat, Chairman of the
New Slovenian Party (NSI) encouraged further speculations concerning further future
privatisation, by saying that the government privatised too slowly. 112 He considered it as
non acceptable to loose more time. 113 According to Borut Jamnik, economic advisor in
2007 of SD Chairman Borut Pahor, the attitude towards privatisation developed into a religious
conviction. 114 Milan Cvikl adds: „The debate about the Privatisation is the debate
of people, who are crying about missed opportunities. […] Unless you identify a group of
investors, you will not have risk takers. We decided for the capital. In the capitalism you
have entrepreneurs, who take a risk, and they have to pay for the risk. If they do well,
than they are the better Slovenes […] I do not think the people are critical about privatisation.
I think they are critical when they see criminals that became rich.” 115 In contrast
Aleksandra Gregorci, working at the Ljubljan Economic Faculty, claims that „[…]the privatisation-targets
must be defi ned clearly so as to improve the long-run effi ciency.“ 116 In
her opinion the privatisation is a key for advancing economic effi ciency. Maks Tajnikar,
106 Rumours after which the Triglav insurances was offered to the German insurance-company Allianz
and according to which the deal had already been made previously, were negated. STA, 30.8.07.
http://www.sta.si/en/vest.php?s=a&id=1187313, 13.04.08, 16:00. In future cited: STA, 30.8.07.
107 Allegedly in the background was Janež Janšas deal to sell Triglav to the German insurancecompany
Allianz. STA, 30.8.07.
108 STA, 17.9.2007. the social democrat deputy of the SD Milan Cvikl named the Mercator-Disposal
„The Mother of all affairs“. Following Cvikls statements Prime Minister Janša agreed to the
sale. The leftist weekly Mladina wrote in October that a secret meeting between Janša, Statessecretary
of the economic Ministry Adrijana Starina Kose, the Istrabenz CEO Igor Bavcar and Laško-
Chairman Boško Šrot had been arranged on 12th of August.
109 The opposition interpretated this as a sign that the privatisation process needs more time
and that the government failed in informing the population about the results of the planned disposal.
STA, 11.11.07. http://www.sta.si/en/vest.php?s=a&id=1208093, 13.04.08, 16:15.
110 Vgl. STA, 27.2.08.
111 Vgl. STA, 18.12. 2007, http://www.sta.si/en/vest.php?s=a&id=1243139, 13.04.08, 15:05.
112 STA, 18.1.08: http://www.sta.si/en/vest.php?s=a&id=1250357, 13.04.08, 1%:30.
113 This got obvious in tried sale of Telekom Slovenia, where the fair market value declined due to
the time delay. Horvat refered to the governments declaration after which the Telekom-Privatisation
and its subsidiary enterprise should be carried out as far as full competition is reached. See: Inaugural-
Governments declaration 2004: The framework of economic and social reforms for increasing
the welfare in Slovenia. Adopted by Slovenia’s Government 3.November 2005. Editors: Government
Offi ce of Growth, State Secretary, Dr. Andrej Horvat, http://www.svr.gov.si/; 12.4.08, 13:50.
114 STA, 30.11.2007: Round table calls for caution in privatisation. http://www.sta.si/en/vest.
php?s=a&id=1214001, 13.04.08, 16:30. In future cited: STA, 30.11.07.
115 Cvikl, Interview.
116 STA, 30.11.07.
729

Professor at the same faculty thinks that privatisation is useful in those areas where
strategic partners are needed. But in his opinion there are as many cases where it is not
necessary. Former Prime-Minister Anton Rop considers privatisation only for the sake of
privatisation useless. The government should rather back up transparency and competition
and not encroach upon privatisation only for political purposes. 117
III.5.4. Internal potentials
For the gradual transition of the Slovenian economy the tradicial role of self-management
cannot be underestimated. It accelerated a culture of participation, which was
adamantly defended by the trade-unions. This participation-culture was consequently integrated
into the social market economy. Without strong unions this attitude would have
propably died away. 118 In companies where worker’s councils and the board of management
had a strong infl uence on the management-decisions, workers unions were deeply
involved even in day to day business. 119 One member of the governing body of a company
stated: „Not much change, management the same, now a supervisory board instead of a
decision making board. Infl uence of workers is through the collective agreement. Better
salaries and work wages and fringe benefi ts based on results, profi t sharing through dividends.
[…] The cost of privatization was too long and too costly, involving management
in the process and not attending to business. But workers ended up with a good share
of ownership, 65% when all the reserved stock is distributed, and management admitted,
it was good to have the workers involved.” 120 However in future important factors
might erode the positive attitude towards the self-management-system. First the workersshares
are getting tradeable in order to meet the workers needs when they retire. Second
population aging-process and hence the inevitable decrease of unions can give rise to a
new generation that does not identifi cate itself as strongly with the traditional scheme of
worker participation in Slovenia as the elder generation did. 121 Third and maybe the most
eroding element could be the EU-membership.
117 STA, 30.11.07.
118 Ferfi la, G., Grizold, A., Loxley, J., Phillips, P. (2004): On the sunny side of the alps (Historical,
Political, Economic and strategic factors in independent Slovenia), Ljubljana, Fakulteta za
družbene vede. Here 90. Future cited: Sunny Side, 2004.
119 It is only a guess that profi table enterprises in which the employees posessed a big part
of stocks did not allow many changes. Rehabilitation and sustainable growth already took place
long before the changed ownership structure. In the monitored companies there are no data which
could prove a coherency between ownership structure and profi ts after privatisation. The alternative
perception, whereby more ownership will motivate employees and will generate higher profi ts
and productivity couldn’t be confi rmed either by the data. Ahles Vahcic (1997): “The Future of Self-
Management: Refl ections“, in: Making a new Nation: The Formation of Slovenia, Edited by Danica
Fink-Hafner and John Robbins, Aldershot: Dartmouth) monitored the statistical signifi cance of
this thesis. His regressions did not feature any signifi cant correlation between both variables.What
prooved to be statistical signifi cant was the relationship between the percentage of workers with a
college education, the ownership structure and the profi tability. (See:Vahcics, 1997, 237-238, OLS
and other methods) It is not entirely clear how these results can be interpretated. We could for example
hypothesize that college educated workers are rather interested in controling their position
and/or better technologies and increased use of human capital appears more profi table. In: Sunny
Side, 2004, 89.
120 Sunny Side, 2004, 88.
121 Sunny Side, 2004, 91.
730

III.5.5. Combat against national Monopols?
Monopolies, high infl ation in the food-market and lacking competition in the private
sector are amidst the results of the gradual Slovenian transition process: „We had no
competition, or if it existed, it was not aggressive enough. In these circumstances business
took its advantage. The government did not set the rules, and business did what it
wants”, comments Mrak. 122 But how can the government fi ght against such monopolynetworks?
Following Križanić „[...] It was primarily an abuse of internal information.The
desired positive ending would have been that the tycoons will orient themselves on the
German model of family companies and capital will stay in the country. The bad scenario
is, that the tycoons fi rst become rich, than sell their shares to foreign investors and
live their pension in Florida!” 123 Mrak is sceptic with respect to assertive help of the EU.
He adds: „The EU is good in technical issues. But in some segments they made terrible
mistakes. Personally I am disappointed by the ECOFIN, which should be more critical
about our fi nancial policy. In the long term they see the aging problem, but we all know
that long before already, in the medium term we are confronted with fi scal problems.
This is an issue for the government. The actual good results a on the revenue side are
mentioned. But they are as high on the expenditure side. As long as we have success,
everything is going well. But just imagine the growth rate goes down. Then we could not
lower the expenditure side fast enough to balance this scenario. The Commission did not
write this in any of their reports, and they always have different reasons for this. When
we entered the Euro area, they argued that it was too early and we must wait. Now it is
the actual presidency and the image of Slovenia. What comes next?” 124 Mušiï compares
the monopolies with an artifi cial plant of political interests and doubts their chance of
survival without national protection and within international markets under normal conditions:
„[…] Companies like Pivovarna Laško are a kind of incest-companies. They only
buy shares of each other. The tycoons profi ted from political circumstances. How will
they survive without them? Mercator was successful in the Balkans, but only with the
help of the Slovenian government. However there are also positive examples like Krko
or Iskratel. […] The economic elite will grow but we have to distinguish between people
with an economic background and those who act merely politically. In future we have to
think and act globally! 125 “
III.5.6. Future Models of Privatisation
In this moment the prevailing question is, whether the Slovenian privatisation- process
is stagnating? Gaspari does not expect privatisation delays through the applied gradual
reform-policy: „It is better to wait a bit until the prices go up. We are and were not in a
bad situation and we should not embark on privatisation only for sale […]. 126 ” Križaniï also
favours a further careful privatisation to be modelled on the banking-privatisation. „ […] It
does not matter whether the bidder is foreign or domestic. The most important aspect is
the ownership structure. We are dealing with a small economy. It was and still is a strategic
decision, whether we want to be dominated by our neighbourhood. In the case of the privatisation
of the Nova Ljubljanska Banka it was well done: One third for the government,
122 Mrak, Interview.
123 Križanić, Interview.
124 Mrak, Interview.
125 Mušič, Interview.
126 Gaspari, Interview.
731

one third owned by strategic investors, one third owned by domestic investors […]. 127 ” He
proposes the same privatisation-model for Triglav: „[…] We need to get out of this interventionist
state of government interventions. The government should preserve the assets,
but not as an active shareholder but rather with a fi xed rate of return for investment. […]
We need to loosen control on the enterprise sector but we must keep the capital here. We
need more money in this sector, active partnership. In the fi nancial sector we did quite well.
Government is not functioning in a required good management. The supervisory boards
should be composed by independent people, rather than foreigners. […] The government
should only preserve the capital base, but not interfere in daily business. Unfortunately in
the past and present politicians tried to exert infl uence. If however there is no chance to get
the necessary independence at home, we must get experts from abroad. 128 ”
732
V. CONCLUSION
Slovenia’s gradual transformation can all in all be considered to be a success. The
country has a functioning market-economy which can compete with the Common European
Market conditions. It was the fi rst of the new EC Memberstates, which was able
to join the Euro-Zone. Key fi gures for measuring economic results like GDP growth,
unemployment rate, purchasing power of the average population, wages, living-conditions
show good results indicating that Slovenia has come very close to the EC average
rate without encuring special hardship, social setback, and other disadvantages for the
average population as it happened in many countries which chose a less gradual way of
transformation and oriented themselves more along the lines of the Washington Consensus.
129 Svejnar 130 emphasizes, that Slovenia had a very good transition-starting position,
acting as a small country and from a very high development-level, and orientated
towards the western market. 131 Kračun agrees with Marangos 132 , that due to the non- typical
gradual- postkeynesian measures, Slovenia achieved a better result and incurred less
transition costs. 133 The social transfers were adjusted to infl ation, the entrepreneuership
was boosted and many administrative barriers were abolished. More state-aid, alternative
routing of the public fi nances- and foreign-currency-funds, helped to advance modern
projects. Within the structural reforms regarding tax-policy (less labour-costs), Slovenia
could also chalk profi ts. The very specifi c way of gradual transformation which Slovenia
chose to follow in the course of time however also implies some developments and characteristics
which may hamper an ongoing “better than averidge” performance in future.
On the basis of the analysis in the preceding parts it will be shown that the basically
127 Križanić, Interview.
128 Križanić, Interview.
129 Sunny Side, 2004, chart 2.4. Employment and Labourforce, 54. Source: IMAD, Autumn Report
1997; Spring Report 2002; Slovenia, Economic Mirror, April 1996; Bank of Slovenia, Monthly
Bulletin, August 2002.
130 Svejnar, Jan (2002): „Transition Economies: Performance and Challenges.“ Journal of Economic
Perspectives 16, No.1 (2002): 3-28, Future cited: Svejnar, 2002.
131 Svejnar, 2002, 26.
132 Marangos, 2004, 442
133 Kračun, Davorin (2007): Post Keynesian model of transition and economic performance in
Slovenia. V: Economic integrations, competition and cooperation. Rijeka (etc.) Faculty of Economics
(etc.) 2007, 22

positive gradualism sometimes and in some fi eld, especially privatisation, showed down
so much, that developments almost came to a standstill.
The more and more gradualistic, and thus ever more cautious approach to the necessary
change and reform measures also indicates a failing readiness to assume risks- a
characteristic without which a successful development of economy is not possible it will
therefore be necessary in future to carry out some necessary reform steps with more
vigour, if Slovenia does not want to risk set backs in its economic performance in the
years to come.
V.1.Critics: “We gradually moved away from gradualism!”
After independence in Slovenia, gradualism helped not to loose too many jobs and
keep up the economic output. It guaranteed a relatively stable economic growth-rate and
offered the economic-agents more time for reform-adaptation. Hence gradualism reduced
eventual social anger or reform-withdrawal. In contrast to the shock-approach the measures
of the gradual approach had to pass the democratic procedure. The gradual model
was thus the right decision for the general economic, social and political sustainability of
the Slovenian reform-process. Slovenia made big progress along the transition-path and
its socioeconomic development. Seeing Slovenia’s development-level and life-standard, the
Slovenian gradual transition process proved to be the right decision: Within the group of
new EU-memberstates, the country has the highest and constant economic growth rate. 134
But like any other transition-strategy, the gradual-transition is not perfect.
Jože Mencinger sees cause for serious concerns, because according to him „Reality
since independence is far more focussed on gradualism than its biggest advocates had
ever dreamed of.” 135
There were always different opinions, to which extent the gradualistic approach could
have hampered the speed of reforms. Kračun 136 says „[…] in the beginning we were also
convinced that shock- therapy is the right way. But as in all other countries in transition
at a certain stage we all found out that shock therapy has a good and bad side. A patient
may cure from a shock but it may also die. So when things started to go into the right
direction we did not need to push with another shock. We are rather conservative in
some aspects. So I would not say that Slovenia is a case of a true gradualist approach. But
I would say that Slovenia is a combination of shock-therapy and gradualist approach.” 137
Križanić sees no slowdown through the gradual reforms. „No, it was not slowed down.
The exchange market was fi rst to change. In this sector the banks developed a behaviour in
which we very quickly got hard currency. So the cheap money-supply ended. Enterprises
had to deal with it and lay off employees. Also the institutions adapted quickly to the new
circumstances. It was a steady and moderately slow spread of ownership, which suited
Slovenias mentality […]. 138 ” In contrast Janez Šušteršić 139 points to the gradual approach
134 This was reached after initial stabilisation without serious macroeconomic, social or political
inbalances in the era of the nineties.
135 Worldbank, 2004, Chapter 5, 67-83; here Foreword 23.
136 Kračun, Interview.
137 Kračun, Interview.
138 Križanič, Interview.
139 Interview with Dr. Janez Šušteršić, University Primorska, Faculty of Management, Koper.
Interview on 1.4.08, 11:30, Ljubljana; Future cited: Šušteršič, Interview.
733

as one of the main reasons for the slowed down reforms. He differentiates between two
periods: „[…]One is from 92 until 96 where gradual measures were appropriate. In the
second period from 96 onwards he would have liked to see more competitiveness, and
development not being hampered by the monopolists. Actually there is a feeling of need
for an urgent change. We are moving away from the gradualist transformation. Four years
ago we tried to get from traditional- social contract to the anglosaxon model – not possible”,
says Šušteršić 140 . Mušič supports this: „Well, gradual always means slower. I see a
kind of paradox in Slovenian behaviour. On the one hand we prefer the slower approach
on the other hand some things change so fast that we do not even notice it. If a society
is very young, some things go faster than originally expected.“ 141 Mitja Gaspari thinks,
that much depends on the fact with whom you talk about it. From todays perspective,
he sees the decision for the gradual way as the right one: „ […] the potential is limited in
a small society, and the capacity of the society is also limited. Our fi rst aim in the past
was not to follow the advices of the IMF or the Worldbank, and not to follow the therapy
for rapidly curing the infl ation pressures. 142 ” Mojimir Mrak 143 does not think the gradual
approach to be the best but rather sees it as the most pragmatic one in previous times.
Milan Cvikl 144 approves the gradual approach, as it helped, to constantly build up and
strengthen institutions. „ […]If you are jumping, you cannot really hesitate in any kind
of a quick stabilisation program. But having in mind former Yugoslavia, which Slovenia
was part of, institutions had practically been built over the last 30 years. The fi rst time
when we commercialized banks was in 1956. Hungary did so only 30 years later. So in
that context the gradualist approach had helped. We followed the good German proverb
‘langsam aber sicher’. So willingness of the reform is there if people have realized, that
there is safety for them. This was a very important part of the reform. Then of course,
there were no objections to the reform. Even if you had to close companies, you had social
security in form of retirement. People knew that they could rely on government. 145 ”
V.2.Critics: Failing readiness to assume a risk?
In addition to hampered reforms, failing readiness to assume a risk is mentioned as
a direct result of the gradual approach. According to many critics, the Slovenian government
did not really take a chance in economy-transformation and restructuring. Therefore
it now has to embark now on more adventourous measures in order to accomplish
the reform- process. Šušteršić says: „Better to take a greater risk. We need a visionary
leadership, which tries to reveal consensus and the consensus mentality. We should not
settle for a minimum. 146 ”
On the other side Gaspari points to the previously shown Slovenian risk aversion:
„Right now we see fl uctuation, vulnerability, economic adicts. We should not take more
risks - better to do a combination - balance between two sectors, better to have a well balanced
stability. Now the growth is the high price. The higher infl ation is caused by this.
People are not happy. Social stability is in danger. Yes to the risks, but the policy needs to
734
140 Šušteršić, Interview.
141 Mušič, Interview.
142 Gaspari, Interview.
143 Mrak, Interview.
144 Cvikl, Interview.
145 Cvikl, Interview.
146 Šušteršić, Interview.

specify risk targets and goals in medium term. This government promised a lot of things
but then failed.” 147
Gradual transitionreformers see defi ciency symptoms like lacking reforms in general
as remaining hangovers of the previous partially applied shock approach. Križanić for
example is proud of the gradual Slovenian path and the fact that Slovenia did not bend
down before the Washington Consensus- Dogma. In his opinion Slovenia now stands
a big chance: „Why imitate European policies. We did not imitate any of them, like the
Austrians did for example. If you go to Austria you will see technology parks everywhere.
We did not take that fast road, we see our chance right now! This is our reserve. We do
the stimulation of enterprises now and therefore we use the EU-funds.” 148
Looking back, Kornai says that his previous recommendations regarding the ownership-reform
were correct, whilst in the macroeconomic stabilization he partly failed. 149
Concerning the actual situation Kornai judges the polarisation between gradualism and
shocktherapy as simply wrong. He thinks that every element and process needs its own
specifi c speed. 150 Svejnar 151 doubts, that the initial conditions and the nature of reforms
can explain all transition results. He monitored the four leading transition-countries Poland,
Slovenia, Hungary and Slovakia, and recognized that each of them developed its
own complete set of reforms and proceeded with its own individual speed. Cvikl, looking
to European data, is happy with the gradually undertaken reforms, but underlines the
necessity of deepening entrepreneurship:„ […] Seeing the consequences, I think we did
right, […] I disagree that by taking a greater risk, we should undertake reforms […]. I still
argue, that the European way of living, and here I mean the quality of living, was solidarity
based. Because you know, we had some help, education, a social safety net, fl exicurity,
health protection, environment protection. All that, still provides us with a stable economy.
You cannot go the China way in Europe, because you would have trade unions on the
road. I think it is wrong to go the China way, because it is a dictatorship- well not a dictatorship,
but it is a monoparty-system.[…] I think, the issue is that, we have to move to
the higher valued products. Unless you have rich people, unless you have entrepreneurs,
who are not coupon-cutters, but who are entrepreneurs and invest, you can’t get a higher
level of value. 152 ” Mušič is convinced that the actual society-model includes a possible
readiness for risks: „[…]society is hard to change, but I have a proposal concerning this
147 Gaspari was President of the National Bank of Slovenia up to February 2007, at the time of
interview he was on the opposition side.
148 Križanić, Interview. Until 2013 Slovenia is going to receive money from EU-regional funds.
The western part of Slovenia is already highly modernised.These funds are to be used for the lessdeveloped
eastern part of Slovenia.
149 Kornai, J (2000b): What the change of system from socialism to capitalism does and does
not mean. Journal of economic Perspectives 14 (1): 27-42.
150 Kornai, J (2000a): Ten Years after The road to a free economy: The author’s self-evaluation.
Paper presented for the World bank Annual Bank Conference on Development Economics, Washington
DC, April, Future cited: Kornai (2000a).
151 Svejnar, J (2002): Transition economies: Performance and challenges. Journal of economic
perspectives 16 (1): 3-28.
152 Cvikl, Interview. In the interview he added “[…] What we have reached in Slovenia is a very
average type of European standards, in ownership structure, we did better than others […], we did
EU-like concerning the fi nancial sector, the insurance sector, the privatisation sector, and when
we will do in Europe the adjustment to the globalisation then yes, I think we will have to do more
risks.”(Milan Cvikl)
735

problem, […] We should aggressively search for foreigners. In our company for example
we have only one Irish employee. I asked him about the successful Irish transition-model
and the secrets behind it. He said that most important step was a changed governmentattitude
towards foreigners and more fl exibility. This would mean for Slovenia to look for
foreign Slovenians, who went to other countries and gained experience there. They could
improve the Slovenian development, and if this group is big enough, new changes within
society will be possible. Slovenia needs more people like Türk 153 , people that have been
to foreign countries so as to prevent a new ‘Galapagos’ here. 154 “
736
V.3. Future Reforms
Although the overall picture is still positive, Slovenia lost some of its former advantages
via gradualism. Further structural reforms are necessary in order to guarantee economic
growth and a good performance.
Especially in the fi eld of privatisation the question arises how the economy can be
transformed within a system of increasing governmental power into an unregulated market-economy?
Here the gradualists still owe an explanation. According to “gradual utopia”,
the state will gradually „run dry“. Yet as we have seen the state is linked with privileges
of bureaucracy, with lobbyists and sector interests and hence will be kept alive with
its interferences by these agents. In the short run, reduction of infl ation will be one of the
most important issues which could endanger macroeconomic stabilisation in a highly export-orientated
Slovenian economy. In the medium-term public fi nances and structural
policies will be the biggest challenges. Although Slovenia made a huge progress towards
institutional networks for a modern market-economy, the danger of set-backs remains.
All the experts acknowledged that further institutional change has to lead to an alteration
of the role of the states. This needs further reforms regarding governmental services,
education, health, social aid, the laws, defence, security, and market regulation. After the
ERM-II agreements 155 , Slovenia lost its independence in money-policy. This had been one
of the major assets in the shaping of the economic policies and achieving macroeconomic
stability the initial years of independence. The importance of other macroeconomic
measures such as notional fi scal- and income-policy has therefore increased. They have
to be coordinated with the parallel EU-policies. If Slovenia’s methods will not prove to
be fl exible enough, the countrys ability to cope with shocks will be reduced and the risk
of further instability will rise. Despite the big advancements with respect to the management
of public fi nances during the late 1990ies, the actual goal of a generally longterm
balanced budget has not been met. Cvikl and Gaspari ask for further efforts regarding
tax-policy, tax-reform and the management of public fi nances. 156
153 Danilo Türk, a Slovenian law professor, diplomat and politician. Since 23st of Dezember
2007 he is President of Slovenia. He was the candidate of the Social Democrats and stood against
the conservative candidate Lojze Peterle on 11 th of November. Türk won against Peterle with 68,03%.
http://de.wikipedia.org/wiki/Danilo_T%C3%BCrk, 12.5.08, 13:45.
154 Mušič, Interview.
155 In March 1979 the European Community introduced the so called ERM (European Exchange
Rate Mechanism) in order to achieve monetary stability and reduce the variability of the exchange
rate in Europe. ERM is also a preparation-program for the introduction of the single currency euro.
See: http://en.wikipedia.org/wiki/European_Exchange_Rate_Mechanism, 1.6.09, 17:00.
156 See: Worldbank, 2004, Chapter 12: Fiscal Policy and Public Finance Reforms, 189-208.

The most demanding challenges will be the restructuring and privatisation of the
corporate and fi nancial sectors and the public vested rights. In the actual period of postprivatisation,
the companies are confronted with problems concerning ownership-consolidation
157 , establishment of propper enterprise-organisation 158 and restructuration of
companies. 159 Along with this and as a clear result of the slower, gradual reforms more
foreign direct investment is missing. FDI-recruitment should be given special attention by
future reform-measures and also promoted as an integral part of the national economy.
Many investors miss neccessary factors of successful and sustainable entrepreneurship
such as enthusiasm and risk appetite: „If you want to set the FDI genious in the bottle
free, you have to rub the bottle the right way“. 160
In line with this a framework of a more friendly role to business internals and a more
pro-active and effective management of the investment-agencies are necessary. Experts
stressed that Slovenias market should not concentrate on labourintensive industries and
heavy industry but rather on knowledge and high-tech activities. In order to improve
the performance of the Slovenian enterprise sector ownership consolidation has to be
accelerated.
New companies have to grow or have to be reconstructed and therefore the state has to
lay down its paternalistic role and diminish its power within the producing sector. Otherwise
it will be diffi cult to compete within the internal EU-Market. The experts further noted
that reforms of the public companies have to be implemented with even more and stronger
determination. The policies in the enterprise- and fi nancial-sector have to offer better conditions
for an improved competition-competency of the private economy. Primarily a reliable
and cost-effective setup within the energy-sector, in transport, telecommunication
and with local service-providers have to be assured. All these measures can be reduced to
the common denominator of a more developed and market oriented infrastructural parallel
to a restrictive fi scal- and wage policy. The social-policy has to be modernised, and the
economic activity has to be set up in a more transparent way. Initially more radical reforms
were planned regarding the pensions- and healthsystem. But numerous political compromises
about their implementation softened these reforms. The underlying principle of all
these reforms must be to commercialise infrastructural services. Reforms should be continued
in order to achieve and maintain a cost-effective production, independent economic
managers, increasing competence and effi cient regulation within investments. In accordance
with the Lissabon Agenda, the dimension and the time-frame of these reforms were
lately redefi ned in order to push the structural reforms ahead. 161
Slovenias choice for gradualism had been an endogene choice and in retrospective it
turned out to be the most adequate beginning for Slovenias transition. Therefore it did
not come as a big surprise that this approach was neither questioned by the population
nor by economic experts for a long time. A systematic critical analysis concerning the
Slovenian transition-tiredness appeared only lately. 162 In future, Slovenia should proceed
157 Obviously we can detect long-lasting differendes between internal and external owners.
158 Most important will be, to bridge the gap between real long-term and strategic owners.
159 Due to problematic enterprise-organisation, defi cient macroeconomic conditions- especially
exchange-rate policy and lasting administrative barriers, this happened delayed and slowly.
160 The Slovenia Times, 9. November 2007, Jernej Šmajdek, Rubrik: Foreign Direct Investment, 7.
161 See. Worldbank, 2004, Chapter 24: Political Economy of Slovenia’s Transition, 399-413.
162 These fi ndings were presented by a group of economists at the conference for economic
policy by the Slovenian chamber of commerce.
737

with further reforms appropriately and target-oriented, based on the very good results
that have been achieved so far. „Now we have to put these good ideas into action!” 163
VI. The Slovenian transition model: Searching for assignability or an alternative?
It is worthwhile to examine, looking back from 2008, whether (according to the experts)
there was any alternative to the Slovenian policy-mix in the nineteennineties until
today and whether the specifi c Slovenian way of transition can be fully or at least partially
applied to other countries which are on their way of transformation into merely
industrially high developed economies?
738
VI.1. Alternatives to the slovenian way?
In retrospective, Križanić sees no alternative model to the gradualistic approach: „
[…] We never had this big crush from the Russian communist planned economy into
the capitalistic form. It was rather a smooth transition in economic areas. But we initially
had no foreign investors capital infl ow in the 90ies. Slovenia was seen as a part
of former Yugoslavia, and this was seen as a war zone. In the late 90ies the fi rst Italian
companies came here. Our fl oating, dirty exchange rate led to economic growth“. 164
In contrast Kračun thinks that ”[…]There is always an alternative. Looking back I am
proud of all what we did, but did we use all our possibilities? The American new deal
made many mistakes in the beginning, but from historical perspective it was successful.
The same is the case with Slovenian transformation. If you make decisions you
are bound to the circumstances of the day. I am sure that many mistakes were made.
But looking back and seeing that Slovenia in 93’ had a rate of real growth between 3
and 4% and the living standard progressed, we realistically used the opportunities. But
many things could have been done better. The opposition always criticises the government.
Considering all the circumstances and looking back from 2008, I think things
were done properly. 165 ” It cannot be alleged that Slovenia was restricted to decide or
plan this gradual model. The core ideas of the Slovenian transition-strategy stem from
economic assumptions like those of the other states. But the policy-measures were oriented
and adjusted pragmatically on actual programs and problems. „I fi nd it problematic
to say whether the decision for the gradual approach was right or wrong. In comparison
to other states we were lucky and successful. Partially we owe it ourselves that
life-standard and life-quality are high“, says Mušič. 166 „The fi nal result was an original
and fortunately successful combination of transition policies enabling macroeconomic
stabilization and growth,” comments Kračun. 167
So all in all the experts agree that alternative models were available, but taking into
account Slovenias special situation, the pragmatic and gradualistic approach was probably
the best way to proceed.
163 See. Worldbank, 2004, Janež Šušteršič: Kapitel 24: Political Economy of Slovenia’s Transition,
399-413.
164 Križanić, Interview. Answering to the question, why the shock-therapy successfully worked
in Estonia, he answered: „ […] Well they had strong economists, and also two societies, a Russian
and a European orientated one. There you can already fi nd the potential to start radically. But above
all they had a big capital infl ow from Finland and Sweden.”
165 Kračun, Interview.
166 Musič, Interview.
167 Kračun, Interview.

VI.2.Assignability of the Slovenian model
After the traumatic Washington Consensus experiences worldwide many states orientate
their transition-strategies now on the gradual model. Therefore the question arises
whether the Slovenian model can be copied by other states? If so, to what extent and
under which preconditions, considering the defi ciencies which are also inherent in this
model, and which have been discussed in the previous chapters?
With respect to the transferability of the Slovenian model the experts differ extremely
in their opinion: Križanić for example thinks that the model is indeed transferable on
other states: „[…] the only precondition is, that the country is not corrupted, or has been
political mislead for many years, like for example Serbia or Russia. In both countries,
after Milošević in Serbia and Jelzin in Russia people were used to corruption and political
mischief. Both countries started transition by choosing a fi xed exchange rate, a fl at
tax rate, stable money supply, budget balance. It should have ended in a surplus, but
now you have a year to year balance. Everything crashed down. So in both cases the fi rst
rule is, you have to slow down and calm the market. There must be a basis on which to
build the gradualist approach. Brasil is a positive example of gradual transition. On the
other hand Argentina failed with the neoclassical model. It now however also started to
use the gradualist approach. In North- Korea it cannot be used. There is no basis. That
is also the case for Macedonia and Bosnia. Croatia should have used the gradualist approach.
But the country is still under the monetary-pressure of the IMF and international
money- debt control. Furthermore the Croatian people always had and always will believe
in money miracles. 168 ” In the end Križanić also refers to the defi ciencies within the
otherwise highly appreciated gradual model: „I think the money and the institutional
part were good. The development part was not good. We did bank and real estate- reconstruction,
but there was no investment for the future. The only forward looking project
which we did was the highways. 169 ”
Gaspari underlines that the Slovene population was never open for external advice.
Hence he does not think it proper to give advice to other countries. Regarding the Slovenian
experience he says: „ […] If I should give any advice, I would just speak about the
really important preconditions in the state of the structural economy, the good coordination
of different institutions, coherent ideas and the manner of proceeding. There needs
to be a sort of medium short strategy, capable to pick up important issues, a coordination
manner. It also needs a bit of luck- not too much, but so as to give the people enough
energy. Furthermore it is important, how you balance social and economic issues. The
consensus type of policy is important. By using it, you can handle a lot of social issues
and problems. But if you start pressing or not allowing the people to participate, you will
have problems. 170 ”
Mrak doubts whether the Slovenian transition-approach is really transferable to other
interested transition-countries: „[…] I would fi rst like to see the country which wants to
adopt a pure gradualist approach. You have to remember a transition like ours fi rst needs
a communist country which wants to change into market economy. If we take the Balkans,
I would not fi nd an appropriate example. They are all very different from us. If you
ask me, what I would advise them, I would say they should use our experiences in the
168 Križanić, Interview.
169 Križanić, Interview.
170 Gaspari, Interview.
739

EU- Accession process strategy. The legal basis is similiar. All of them except Croatia are
grateful for our advice. Only the Croatian people think that, if a Slovene consultant tells
them what to do, he has something else in mind. In Macedonia and Montenegro they
welcome us as advisers. In Serbia they still cannot swallow the loss of their former leading
position and cannot stand the situation to be led from small Slovenia. But in technical
terms even they listen to us. We have the same logic, language and jurisdiction.” Kračun
agrees with him at least in some points: „[…] if the preconditions were the same, then of
course I would suggest the Slovenian way. But as preconditions are never the same, my
suggestion would be to study the Slovenian case, but not to use it without any second
thoughts. Perhaps there were some good moves that could be successful. But our way of
transforming the economy and the society had many special pragmatic elements. The
only thing we really had was the consensus, […] but it does not work anywhere. Every
country has to proceed pragmatically. The Slovenian case is a good case to study, and
perhaps to adopt it, according to circumstances. 171 ” In this context Kračun highlights
the very unique and very positive Slovenian transitional preconditions: „ […] that we
got cash in the fi rst part of transformation, due to export into the western markets. The
companies that supplied Yugoslav markets lost their area, so they didn’t have to import
anymore. At the same time, due to shock in former Yugoslavia, wages were very low. In
fact we could hold them at that level only for one year, then they exploded. But I would
say, the stars were in a proper position, so everything, even the rise of wages in the
proper moment, pushed the economy ahead in 1993. We did not have any valuable pattern,
because Slovenia was far advanced in trading with world market. Slovenia already
operated in the western market for a long time, and a fair share of former Yugoslav trade
went through the Slovenian market, because of our management and experience with
western markets. At the same time, the self management model of former Yugoslavia
guaranteed some ‘autonomy experience’ in the leading companies, although the Yugoslavian
economy was ‘freaky’. The companies followed this system, but they did not trade
with proper prices due to high infl ation. Yet they were behaving like normal independent
companies. Their experience with western markets was not available to other eastern European
countries. We had to go on our own and use the advantages we had. On the other
hand, the war in former Yugoslavia made Slovenia being seen as a dangerous country
with high risks. So Slovenian companies had more troubles in maintaining their market.
Slovenia is best comparable to the countries of the fi rst wave of new member states in the
European Union like Hungary, Slovakia, Czech Republic and Poland. In comparision to
them Slovenia had a better economic starting position but a worse political position. 172 ”
Šušteršić also sees no real possibilities to copy the whole Slovenian transition-path. He
mentions the conditions which led to Slovenias choice of the gradual transition: „[…]This
gradualist approach grew out of the state of affairs. It developed the mentality and the
171 Kračun, Interview.
172 „One reason for cash infl ow was that the government sold all these apartments, and there
it seems to me, that you had a great infl ux of money from Slovene workers in Germany, who now
could get a cheap apartment! It was also a possibility for people, who took money out of their stockings
on Austrian banks, and they took it to buy fl ats. If you see the prices- ridiculous. An average
price for a two bedroom fl at for 4-5000 Marks. The fl ats were cheaper than cars. Everything was
sold out. It was also an injustice, because it was available only for people who lived in these socially
owned fl ats. […]If you were the owner, you had no chance, it was one set of a transition measures,
with gains for some people and loss for others.” (Kračun, Interview)
740

mentality developed the gradualist approach. So all in all- it fi tted for our country! You
cannot transfer the whole model to another country. We only looked to all the countries
in which the Washington consensus failed. But what about Estonia for example. They
really did the Big-Bang-Approach and were very successful. It was suitable for them but
not for us. The same is valid for the Slovenian Model and other countries. I think, different
parts of the model can be transfered. Especially the people in the Balkans see us as
an ‘Orientation Point’. They say, that we have the same historical burden, more or less
the same values. 173 “
Cvikl thinks that „[…]the gradualist approach can be a model applied with success.
I was at the Europe Asia meeting in 2004, and I spoke to Indonesians. These are societies
which are between democracy and dictatorship. If they want to have democracy,
they have to do it gradually. For Africa the same applies. Latin America- well, you know
America to America. It is much more diffi cult. […]
So in that context, if in Africa and Asia we are really sure, that these countries are on
their way to democratic society. Then this is their recipy book. That is how I see it. Not
because it is Slovenian, but because it covers systematically over all the issues. I give you
an example: Banking. Institutional banking reform was extremely important, but what
is it all about? It is all about working with the skills of people, not only on skills to give
credits, but skills of the people, who do the risk assessment, the internal audit etc. You
have to give the people the right set of skills, and that is what the gradualist approach
provides. If you do the price assessment of a bank, then the risk assessment is done in
prices. People in Paris should never be the most powerful bankers in Slovenia, because
people in Paris have no clue about the risks in Slovenia. But the transformation of the
knowledge of the people in western Europe, on risk-assessments, internal audits etc. did
provide a good basis for the Slovenian gradualist reform. 174 ”
Cséfalvay found out in his research that analogies between transition states are useless.
They do not refl ect the enormous complexity of transitionprocesses from planned
to market-economy. Till today the economic literature and analyses written especially
for business-men are dominated by the idea that the complete middle-eastern-european
transition-process can be compared with the „catch up”-effect of the southernasian tiger-states.
Grandsen for example asks: „Why can’t Central Europe grow like Asia 175 ?”
Contrary to these opinions, based on analogy-theories, Cséfalvays monitoring shows that
the transition from plan- to market-economy in the developed industry-states is not comparable
with the catch-up-process of the Eastern-Asian Tigerstates. 176 Different to the
former socialist countries the South Asian countries as well as the Latinamerican countries
have never been cut off for such a long period from the capitalistic world economy
system. Furthermore the catch-up-process in South-Asia and Latin-America was always
boosted by a strong state-controlled regulation, which could have never worked out in
such an intensity in the transitional period of middle-eastern European countries. 177 Due
to historical experiences, such a strong infl uence of the state (from the social as well as
173 Šušteršić, Interview.
174 Cvikl, Interview.
175 Grandsen G 1996,11, cited in: Cséfalvay, 1997, 17.
176 Cséfalvay, 1997, 18.
177 In the Southasian Tiger-States the state acts as a development Agency and regulates the
process of economic restruction, whilst social structures are regulated and dominated by adaptation
of traditions. See: Cséfalvay, 1997, 18.
741

from the economic point of view) had been no option for the countries of the former
eastern block. 178
Mušič adds some aspects of the Slovenian transition „[…] There should be no totalsale
of the whole economy, as it has been done in some transition-states. There must be
a strategic plan, where foreign investors can do contribute added value. That is where
the sale should be promoted. The existing potential must be activated. In Slovenia for
example you can fi nd a huge amount of technichal knowledge which has to be improved
within the IT- Sectors. Furthermore the certifi cate-system must be reformed because the
people do not know how to handle it. In April the manager-magazine published a ranking
of the 100 richest Slovenes. One third had become wealthy within the privatisationprogram,
the so called ‘Privatisation-Tycoons’. Another third are the real shooting-stars,
the real self-made people. They are the engine for further development. Whereas the
tycoons came to economic-power within the last four years, the ‘selfmade men’ founded
or modernized their companies during the nineties. They can compete within the worldmarket.
[…] If Slovenia can manage to change its attitude towards new people and ideas,
if the privatisation is carefully accomplished by the workers and management, then we
really stand the chance to become the future ‘Balkan-Switzerland’. Mencinger once said,
that we were the best in Yugoslavia and we will also become the best in the EU. I see
this rather sceptically: We still have to do our homework! 179 ” According to Mušič the
Slovenian model can be copied by other societies „[…] that are able to survive even if
they are at that point not fully integrated in world-economy. Furthermore the size of the
country and the existence of a society without many administrative barriers are important.
I would recomend the Slovenian model to countries where the market is not that
big! The Slovenian market for example is complex but not big. Furthermore the so called
Selfcontainment is important. Apart from energy we are not really dependent on other
external-elements. And we really had good pre-conditions. Hence we were able to take
some risks. Regarding all countries from former Yugoslavia we were the most developed
country and we kept on working. We were and we still are ambitious people. But as I said
before: We managed to achieve some things, but we also missed some others. 180 ”
742
VI.3. Conclusion
Summing up the arguments and discussion Regarding the transferability of the Slovenian
model, different opinions can be observed. Križanić sees the whole model to be
transferable. He also pointed to potential countries. Mrak and Kračun on the other hand
consider that the special Slovenian starting conditions and the long-term will to adhere
to a gradual transition model are not given anywhere else. Šušteršić and the majority
of experts underline the exogene origin of gradualism within the Slovenian society and
recommend special gradual reform-strategies which would suit the particular situation
of other ambitous transition-countries. One important pre-condition in order to establish
the gradual reforms are fl at hierarchies and a small size but complex market. But all these
experts also see the need for improvement regarding the Slovenian gradual transitionmodel.
They hence do not recommend to imitate the whole model for a transition-process
elsewhere.
178 Cséfalvay, 1997, 22.
179 Mušič, Interview.
180 Mušič, Interview.

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Interviews:
Davorin Kračun, Professor for Economics at the Faculty for Economics and Business, University
Maribor; Dean of Political Economy-Department; Interview, 31.3.08, 11:00, Maribor.
France Križanič, Head of EIPF: Ekonomski Institut Pravne Fakultete; Interview, 2.4.08, 10:00,
Ljubljana.Mr. Križanič is Finance Minister of the Republic of Slovenia.
Janez Šušteršić, Professor for Economics, University of Primorska, Management Department,
Koper. Interview 1.4.08, 11:30, Ljubljana.
Milan Cvikl, former Congressman and Member of slovenian National Assembly. Former
Head of Finances at the Nova Ljubljanska Banka, former State Secretary for Public Finances
and responsible
Worldbank- Person for Central- and Easterneurope. Interview 3.4.08, 13:00, Ljubljana; Since
December 2008 Mr. Cvikl is secretary general of the government of Slovenia.
Mirko Mušič, worked as Management Consultant for the german Siemens-Company in Munich.
Today he works as director for the „Venture Consulting“-Company. Interview 8.4.08,
19:30, Ljubljana.
Mitja Gaspari, former Chief of the Central Bank of Slovenia and former Minister of Finances.
Interview 7.4.08, 10:00, Ljubljana. Since December 2008 Mr. Gaspari is Minister without
Portfolio Responsible for Development and European Affairs.
Mojmir Mrak, Professor for Economics, University Ljubljana, Finances-Department, Interview
9.4.08, 16:00, Ljubljana
747