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A Wake Up Call For Europe

Amidst general Europhoria over monetary union, an intergenerational schism over Europe’s social and political direction is erupting.

“We made it!” exulted Dominique Strauss-Kahn, France‘s minister of Economy, Finance, and Industry, early in the 29th annual meeting of the World Economic Forum (WEF). Like migratory birds returning to ancestral breeding grounds, the annual gathering of the WEF attracts more than 1,000 chief executives of the world’s major companies, who come to the Swiss resort town of Davos to rub elbows with 300 senior politicos, 40 heads of state, 300 scientists and academics, 200 media leaders, and an equal number of working reporters. Amidst the snow-capped peaks in this semi-remote canton, the world’s elites indulge in intense networking, customer ingratiation, and platitudinizing with one’s peers. Some of the high-profile leaders emerge from their hotel suites long enough to participate in the formal program created by the foundation’s organizers, who describe themselves as “committed to improving the state of the world.”

While “responsible globality” was the official theme, Strauss-Kahn’s remark captured the zeitgeist of this year’s gathering. Having thus far dodged the bullet of financial crisis that wounded Asia, Western business leaders seemed to have written off emerging markets for the moment. Europe was definitely the flavor of the month. “Our American friends were skeptical,” the French minister and former Columbia University professor needled. “For the first time, a single currency representing 300 million people came into being without the help of guns and armies.”

Echoes of Euro-triumphalism came not only from the French. Gerhard Cromme, CEO of the German manufacturer Krupp Hoesch Thyssen, said the euro-the new single currency replacing 11 currencies of the EU’s 15 member countries-would allow European companies such as his to catch up and overtake their American and Asian rivals. Former ABB CEO Percy Barnevik, now chairman of Investor AB of Sweden, contends that much remains to be done to create a better climate for entrepreneurs. But he allowed that the stage has been set for fundamental changes in mar-kets and labor flexibility.

Gerard Mestrallet, president and chief executive of Suez-Lyonnaise des Eaux, the largest power and water utility in France, predicts that the euro will facilitate European company management’s focus on deeper cost cutting, higher productivity, and better cash management. Mestrallet thinks it’s a new dawn for consumers and shareholders alike. “Management will have fewer places to hide,” he said. Even Wim Duisenberg, the former Dutch finance minister and current chief of the fledgling European Central Bank, who, like his U.S. counterpart Alan Greenspan, is not given to public enthusiasms, anticipates a future of confidence building monetary stability.

Considering the degree of difficulty and their starting point, Europeans could be forgiven for giving themselves a pat on the back. All the more surprising then that the one note of discord arose not from America or Asia, but from another corner of Europe itself, namely the next generation of its leaders. The note was sounded fittingly before a blue-chip panel of the EU establishment: Jacques Santer, then-president of the EC; Romano Prodi, former prime minister of Italy and currently president of the EC and a member of the Italian Parliament; Hans Tietmayer, president of the Deutsche Bundesbank; Helmut Maucher, chairman of the Swiss multinational Nestle and chairman of European Roundtable of Industrialists; and Peter Sutherland, former director general of the World Trade Organization and now chairman and managing director of Goldman Sachs International. Representing a caucus of a WEF-organized group called the Global Leaders for Tomorrow (GLT), Fields Wicker-Miurin, a vice president of A.T. Kearney’s financial institutions group, informed these eminences that they had got it wrong.

Europe‘s leaders, she asserted, were focusing on technicalities and not on goals that are meaningful to people. The single currency and the minutiae of the Maastricht Treaty are not what most Europeans really care about. In fact, if Europe‘s leaders “fail to address what we regard as the key performance issues such as unemployment, the aging population, the health care system, environment, and crime,” one can forget about achieving worthwhile unity. Santer tried to wave WickerMiurin off with complicated explanations of why monetary union was one of many necessities. But the North Carolina-born Londoner and self-proclaimed European, (who is married to an Italian executive) was having none of it. Notwithstanding recent progress, she maintained, “we European GLTs believe that if we do nothing more than continue the trajectory that has been set and followed in the past, the results will be disappointing for us and our children.” It’s time for Europe‘s leaders to wake up.

It was a Davos moment. WEF etiquette calls for European leaders of such rank and position to be accorded due deference. These are the heirs of Jean Monnet, who transformed the EEC into the EC and finally into the EU. The Maastricht Treaty is their Woodstock. They are hardly ready to be told that they are out of touch. Santer frowned over the top of his reading glasses. In dueling with Wicker-Miurin, Nestle’s Maucher exhibited the kind of icy Teutonic stare of a person who is rarely contradicted in public.

It might have been easy to dismiss or minimize the charges as a minority view, but there was a problem. The “Wake Up Europe” campaign was launched by European GLTs, an initiative of the WEF itself. Shortly after the 1997 Davos meeting, a small number began to meet regularly to forge a common agenda “to improve the future of Europe.” A year later the effort broadened to include 50 people chiefly from France, Germany, and the U.K., all of whom were in their 30s or early 40s.

“We identified these young leaders,” said WEF founder and president Klaus Schwab,” both because they are outstanding in the field they are working in, but also because they take a broader view of the world.” The discussions led to the “Europe 2050 Initiative,” a manifesto detailing why Europe‘s next generation wants the current leadership to stop what it’s doing and change course. Schwab and WEF director David Morrison, who coordinated the effort, had given Europe‘s young leaders a platform.

In addition to Wicker-Miurin, 40, the three marketeers of the “Wake Up Europe!” campaign are Hubert Joly, 39, president of EDS France, and Ulrich Schumacher, 40, president and chief executive of Siemens Semiconductor Group. “We felt fuzzy in the beginning, but it was clear to each of us in each country that things were broken and needed to be fixed,” says Joly, a tall and trim figure who had started his professional career as assistant to the chairman of Sacilor Group in 1981 and who joined EDS from McKinsey in Paris. “Our North American friends say to us, ‘Gee, Europe is doing extremely well. Why aren’t you guys completely happy?’ I tell them growth is important but there’s more to civilization than per capita GDP. For example, there’s no correlation between per capita GDP and the rate of suicide. Nor is there a correlation with life expectancy. Greece enjoys one of the longest life expectancies but has one of the lowest levels of GDP per capita. Our societies are becoming more unequal and unfair, sowing seeds of future disorders.”

In the Europe 2050 manifesto, the European GLTs argue that despite all the progress Europe has made preparing for EMU, structural deficiencies are going unaddressed. When four of the five largest member countries have double-digit unemployment and dependency ratios that are heading in the wrong direction, the current system is not working. Too much premium is placed on monetary stability at the cost of slow growth and unyielding unemployment-reinforced by the ECB commitment to the euro “uber alles.” Also targeted is an ossified system that discourages entrepreneurialism and an expensive welfare state that is proving unsuited to the task of helping the truly needy. There is also the matter of Europe‘s demographic time bomb for which future generations (“namely ours,” says Joly) will have to pay.

The manifesto calls for Europe‘s leaders to refocus current political agendas toward four priorities (see box): Sustainability, fairness and individual fulfillment, social harmony, and readiness for the future. To underscore their point, the young Turks created an index that attempts to measure how EU member countries stack up. Joly and Wicker-Miurin emphasize that the index is only a first draft in attempting to pinpoint where the EU measures up in relation to their goals and how it compares to the U.S. and Japan. Some of the measures, such as crime data, for example, which serves as proxy for social harmony, need to be more accurate.

Even employment statistics that most governments track faithfully do not reckon with a black market where people actually perform work for cash in countries such as Spain, Italy, and Greece. In addition, each of the four criteria are given equal weight, which they concede may not be valid. A revised index, “release 2.0″ with better data, is being prepared for mid-1999. “We’re executives,” says Joly, “when we manage we like to set goals and define where we want to go. Somehow in Europe we don’t do this. Political leaders shy away from this. They prefer to get into the technicalities of designing a tax system that tactically reduces the cost of low-skilled labor. Instead of putting bricks on top of one another, we want to step back and ask ourselves: Are we building a cathedral or merely a tennis court? We’re not saying Europe‘s leaders are bad guys. They may have noble intentions, but it’s clear that the system isn’t producing on its own terms. In fact it produces outcomes that are less fair than the so-called ‘socially indifferent Anglo-Saxon model.’ “

During the plenary exchange with Wicker-Miurin, Santer, and Prodi expressed sympathy with these goals but avoided committing themselves beyond that. The GLTs don’t expect much from this crowd. “It’s appalling that it has taken 10 years for politicians in Europe to agree that the high social cost of low skilled labor is an issue,” asserted Joly. “How many more years will it take for them to do something about it?” They hope to galvanize Europe‘s next generation.

Are there any rising leaders that inspire hope? Joly points to Nicole Notat, who heads the trade union CFDT, one of the largest in France. During the demonstrations in France in December 1995 protesting proposed reforms of the social welfare system, “Notat,” he says, “was one of the few who said it’s OK to consider such reforms because they were invented 50 years ago in a completely different context-this despite the numerous death threats she received. That was courageous.” The three marketeers acknowledge that changing political agendas is risky for politicians, but that business leaders can help by creating an environment where it’s easier for them to do so. The recent mass resignation of the 20-member executive of the EC illustrates just how fragile EU leadership can be.

Curiously, Europe recently had a courageous political leader who wasn’t afraid to burn part of the socialist forest to reseed an enterprise economy. Yet, while the GLTs call for a risk-taking environment and a less punitive tax system to foster a more flexible and dynamic economy, they shrink from the idea that what the EU may truly need is a continental Margaret Thatcher, or an updated release of market-based reforms-call it Thatcherism 6.0. Joly and Schumacher are doubtful that the so-called AngloSaxon model, as practiced in the U.S. or U.K., is transferable to the continent. While the U.S. does well in the GLT‘s index on economic performance, they point to its lagging position in pollution-20 tons of CO2 per capita per annum vs. 12 for Denmark-the cost of health care-14 percent of GDP vs. 6 percent in Denmar-and the social impact of crime.

To some extent Europe’s hand may be forced by the simple fact that the transparency of the euro now exposes large variances in hourly labor costs among the 11 EU members making up the single currency zone (see box). Huge discrepancies, for example, between Germany and Spain will prompt manufacturers and service providers to reconsider where to place their operations. Admittedly the Eurostat figures revised by Rexecode, a French economic research institute, which include tax, pension, and social security costs, represent only one of many costs business factors into its calculation. Productivity and proximity to markets are no less important. Trade union leaders have already voiced fears that euro zone labor cost differences will allow entrepreneurs to undercut high wage cost areas. Europe may indeed have already had its wake up call.


Can a Trade War Be Averted ?

Fears of a trade war over bananas underscore signs that protectionism is rearing its ugly head not just in the U.S. and the EU but in Asia. Although neither the U.S. nor Europe produces bananas, the Americans con- tend that the Europeans have refused to accept the World Trade Organization’s decisions and have thrown up procedural roadblocks to get their way. The Europeans say they are adhering to the WTO and point to the fact that President Clinton threatened Japan with “retaliatory protectionism” over rising steel exports to the U.S. It didn’t help matters when Japan-in an obvious slight-canceled an appointment scheduled at the last G7 meeting, with U.S. Trade Representative Charlene Barshefsky’s deputy Richard Fisher. On March 4, the U.S. slapped a 100 percent duty on a variety of European goods, from Scottish cashmere to Italian peccorino cheese. During the discussions at the WEF, talk of a trade war loomed. CE Editor-in Chief J.P. Donlon asked U.S. Commerce Secretary William Daley (right) about the fragility of the world’s open trading system and how real he sees the protectionist peril.

Is the post-war consensus on creating an open international trading system over?

I don’t know if it’s eroding, but it’s definitely been challenged. Trade and the discussion of trade has been generally left to the elites. It’s an issue that has some, from Wall Street to Main Street, concerned about globalization, which is a code word for lots of issues, not just trade, but technology advances. And it causes a certain uncertainty among people about their future of their jobs. Even though in America people should be very optimistic, they’re not. Open trade is the whip- ping boy for public fear. The eroding support for trade is also the result of difficulties going on in the other parts of the world.

Why, on the verge of the 21st century, in the age of microchip and hyper biotech, are the U.S. and Europe fighting over bananas when neither side produces bananas?

This has been a six-year battle. We look at it as defending the rules of the WTO. If we are going to be part of a rules-based organization, those rules have to be lived up to, even if one loses a case. We have lost cases and we’ve accepted the results. This is really at the heart of it. It’s become a fight on our side, not just for the bananas, because obviously there weren’t too many banana workers in our country. It’s distributors and the countries of the Caribbean that have had attachments to Europe over the years that are concerned. But I’m optimistic that this will be settled and we’ll get it behind us. I don’t think that one should take the banana dispute and assume that this is part of some growing problem. This has been around for six years. There’s no question in my mind that everyone involved in this would like to see it go away. On the other hand, the Europeans think that we should just keep going through these new panels, new arrangements, and keep putting off the inevitable, which is living up now to the decisions made as long ago as six years.

What about this dispute about hormone-treated beef?

These issues-the beef issues, the biotech issues, modified organisms, genetically manufactured organisms-are major for us. We believe that decisions being taken in Europe regarding these issues are not based upon scientific evidence, as much as on politics, fear, and hysteria among some groups. UN stats suggest that we are going to grow the Earth’s population 50 percent over the next 27 years. We’ve got to feed them. Our companies are developing products that can do that, and I think they’re being blocked from certain parts of the world, and specifically Europe, not based on any science. That’s a major issue for us, because it’s our companies that are in the forefront of these leading technologies that can benefit the world.

Through the Trans Atlantic Business Dialogue we’re trying to address these issues outside the politics, and more by a regulatory agency that can compare their methods, scientific processes, and talk about why our FDA approves these products, and why the regulatory agencies in Europe may not, and try to solve them that way, as opposed to thinking we’re going to solve them politically, because that’s not going to happen.

Is WTO effective considering it has no formal power to enforce its decisions?

It’s been pretty effective. We’ve won more than we lost. They’ve forced people to work out agreements and settle. The fear of condemnation by our colleagues around the world is enough to generally move people. My sense is that the members of the WTO take great pride in the fact that they’re part of a rules-based trading organization.

Is it the U.S. position that the EU is not abiding by the WTO decisions?

That’s part of it. The problem right now is that they’re not; that’s why we’re going to test the process. We think this going to dispute settlement is a victory, because I think there’s no question the Europeans understood that they were not going to win.

At Davos, Vice President Gore called for a new round of trade liberalization. Many forum participants wonder if that really is realistic considering that there are many liberals in the Democratic party who demand more, not less, protection, including organized labor, which helped reelect Clinton and Gore.

The new round is important for two reasons. One, I think there are plenty of issues-agriculture, government procurement, telecommunications-still on the table that we haven’t gotten to yet from the GATT, which was just passed three years ago. Second, to develop a real public consensus in support for free trade. It’s frustrating. President Clinton has been a strong advocate of open free trade with NAFTA and GATT. But it’s frustrating because we know it’s helped the economy. Last year, it was the Republicans who were for Fast Track. A third of the Republican caucus voted against Fast Track. Now, was that just a momentary lapse? Or does that indicate that even amongst moderate Republicans there’s a growing feeling that, due to public sentiment, they’ve got to back off; if such is the case, we shouldn’t just condemn, we should try to figure out why. How do we make the arguments to a person on the street that free trade is good for them? It’s difficult, because they hear about the loss of 100 jobs in their town because their factory went to Mexico.

About JP Donlon

JP Donlon is the Editor-in-Chief of Chief Executive magazine.