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Can Europe Compete?

“Europe has the highest standard of living,” quipped MIT economist Rudi Dornbusch at February’s World Economic Forum’s annual meeting. “too bad it cant afford it.” Is Europe falling behind North-America and Asia- Pacific? The growing rift between U.K and its EU partners centers on two visions of Europe’s future.

DAVOS, SWITZERLAND—The bonhomie in Davos, as 1,200 top executives from around the world meet for the World Economic Forum’s annual joy-through-globalization symposium, at times masked a disquieting mood among the Europeans. Though discussions of issues such as the euro, NATO expansion, EU enlargement, and the harmonization of global accounting standards were relatively bloodless, lurking behind the polite debate are some central—and highly controversial—questions regarding Europe’s ability to compete on a global scale.

One of the more dramatic contentions was Intel CEO Andy Grove’s assertion that European firms are in serious jeopardy, a charge that startled the approximately 800 business and political leaders who had pulled themselves away from the nearby ski slopes to hear him speak. Brandishing a chart of personal computer use by region of the world, America’s dominant chipmaker and author of Only the Paranoid Survive struck a nerve by pointing out that PC shipments in Europe are not only trailing those to the U.S., but they lag behind those to Asia-Pacific as well. European PC consumption is about half that of the U.S., and Americans outnumber Europeans 10 to one in use of e-mail. Figures on Internet use by European companies are equally dismal, with surveys showing that just 6 percent of French managers intend to make business use of the World Wide Web. For German managers, the figure was slightly higher at 10 percent. Yet Europe has an enviable IT infrastructure, according to Grove, who expressed puzzlement over the “growing divergence between infrastructure and utilization.” Grove summed the situation up clinically: Europe is in danger of creating “a technology deficit.” He urged European business leaders to move quickly to avoid falling further behind.

The business-leader participants, roughly three quarters of whom are European or Europe-based, took Grove’s message stoically. A few thought his remarks self-serving. Others allowed that the raw statistics did support the argument. A recent report by The Financial Times concurred, stating that “European PC sales, which grew only 5 percent last year, appear to be faltering, even though the proportion of house holds with a PC is still only half the U.S. level of 40 percent. The U.S. has four times the number of households on-line as Europe, and will have more than twice as many in 2000 if present trends continue.”

But although Grove’s discourse succeeded in bringing these perturbing figures to light, the issue is just the tip of the iceberg. While the sluggish adoption of technology will likely prove a hindrance, other controversial issues plaguing Europe—and the progress of unification—are even more deserving of scrutiny.

The Maastricht Treaty calls for the creation of a single currency, the euro, by 1999. By 2005, all remaining non-EU member European countries become eligible for membership. Poland, Czech Republic, and Hungary are at the head of the queue and will be admitted to the club first. Yet, despite the public discussions and much press ink spilled over Maastricht, EMU, and enlargement, remarkably little debate centers on the central question: What kind of future does Europe have?

The new EU will be so large and diverse that it will need new systems and structures to cope. Will it be a loose confederation of 15-plus nations or a single superstate with vestigial parliaments and governing bodies? Above all, how will these arrangements affect the competitiveness of its enterprises with respect to rival companies in North America and Asia-Pacific? As Nestle chairman and CEO Helmut Maucher told a WEF plenary, it isn’t helpful to have 15 members’ regulations in addition to those created by Brussels.

MUCH ADO ABOUT CURRENCY

 The creation of the euro by 1999 goes to the heart of the sovereignty question. A single currency governed by a European Central Bank forces politicians to make very different spending choices than those to which they have become accustomed. To what degree should national sovereignty be replaced? And by what? Gradually pooling sovereignty or outright central control? “The debate over the euro reveals a deeper rift,” admits Phillippe Lagayette, CEO of France’s Caisse des Depots at Consignations, a Paris-based institutional bank. “It’s a sticky process watching the governments of France and Germany control their budgets. Italy cannot sustain the policies required for a hard currency. If the issue drags on much longer, it might come undone.”

The objective of the single currency is enshrined in the Treaty of Rome and was recognized by all members when they signed it. Britain and, to a lesser degree, Denmark have genuine reservations about this. But the Danish Krone is already tied to the D-mark, leaving England to stand alone in opting out of monetary union. Generally regarded as the EU’s bad boy; the U.K.‘s euroskepticism is increasingly dismissed as irrelevant. When Toyota and Unilever said they might reduce investments in Britain in favor of the continent if the government continues to opt out, many of the politicians in Brussels, Paris, and Bonn could scarcely hide their glee. Yet privately, central bankers such as Jean-Claude Trichet, governor of the Bank of France, admit that while the euro may lower transaction costs and achieve some stability, it will not by itself increase competitiveness of European companies.

This point was underscored by one of the few outbursts to interrupt an otherwise politely serene discussion of which the WEF is justly proud. “How on earth do you expect European companies to be competitive if they have the most holidays with the shortest work week and the highest fixed costs as anywhere on the planet?” asked John Neill, chairman and CEO of Unipart, whose sensitivity to the burdens of bureaucratic costs stems from the 1970s, when labor relations in the U.K. car industry were at the nadir. In 1987, Unipart, the parts division of the state-owned Rover car company, was bought by a management group he headed. While none of the ministers chose to respond to Neill, he later noted that a number of business leaders approached him informally to say they agreed.

ENGLAND—THE EU’S “BAD BOY”

The question Europe’s private sector faces is not whether one is pro-EU or anti-EU, but how can union work best if its enterprises are saddled with costs and regulations that are not competitive in world markets? Current performance of the U.S. economy, though hardly stellar by post-war standards, is grudgingly admired by Europeans. One WEF symposium even discussed what lessons the so-called “Anglo-Saxon model” had to offer. At the same time, U.S. industry is seen by some as techno-centric and obsessively efficient. The French, resentful of America’s success, are staunch critics—Joel de Rosnay, director of Cite des Sciences at de L’Industrie, and an author of books on science and technology, was only half joking when he said, “The French government believes that the Internet and the Web are an American plot and will in time go away.” Committed to its own system, to the French integration means an EU with its “social charter” intact.

The contrast between the paralysis gripping the economies of Europe and that of the U.K. heightens the issue, precisely because Britain has largely escaped the sclerosis strangling its EU partners. The gulf between those economies based on Europe‘s “social model” and the U.K.‘s post-Thatcherite “enterprise economy,” comes across in many fragmented images of disaster. French and Spanish truck drivers nearly brought their countries to an economic standstill because they want to retire at age 55. Greek farmers blockaded ports to protest a government attempt to meet the “Maastricht criteria” on deficit spending. Scores of French state-owned companies are hemorrhaging cash, and the government’s deficit tops $57 billion. Half the nation’s youth aspire to be civil servants, though few jobs are being created.

By contrast, Britain‘s unemployment is at a six-year low of 6.5 percent compared with average EU unemployment of 11.2 percent, with France at 12.7 percent, Italyat 12.2 percent, and Spain at 22.3 percent. Germany is confronting its worst unemployment nightmare since the 1930s, with 4.6 million, or 12.2 percent of its workforce, unemployed—more than when Hitler came to power in 1933.

In the past 20 years, while the U.S.created 36 million new jobs-31 million in the private sector the EU created just 5 million private-sector jobs.Britain alone achieved 900,000 new jobs-45 percent managerial and professional—in the last four years. Jacques Santer, president of the European Commission, parries these figures by scoffing that Europe doesn’t need more low-paying, hamburger-flipper jobs. But the myth that Britain runs a “sweatshop” economy is belied by the fact that average take-home pay is $20,000, nipping at the heels of Germany’s $21,400, and ahead of France’s and Spain’s $17,000. According to the British Management Data Foundation, U.K. wages rose in real terms by 26 percent since 1979, as compared with 3 percent in Germany and 2 percent in France.

The most telling figures are those that show just how expensive it is to employ workers on the continent due to crippling tax and social security costs. While British employers on average spend only an additional $15 for every $100 spent on wages, in Germany, employers must add $31, in France $41, and in Italy $44. This more than anything else explains why Britain receives a third of all the EU’s inward investment, as opposed to Germany‘s one-fifth share and France‘s one-tenth.

Remarkably few of these facts surfaced directly in the main discussions at Davos. Intel’s Grove hit home when he called attention to Europe‘s relatively low IT spending, but the unflattering comparison hides a few details. Europe has produced more than a few exceptional technology leaders, such as software giant SAP and world-class telecoms equipment makers Nokia of Finland and Ericsson of Sweden. The problem is that Europe‘s over-regulated labor market, which makes it difficult to shed staff, inhibits companies from substituting technology for labor and reaping the productivity benefit.

 THE GERMAN MIGRATION

Today one hears reference to “the German disease,”—just as 20 years ago it was commonplace to refer to “the English disease”—which is beginning to drive businesses out of their homeland. Wolfgang Neumayer is one of a growing number who has moved his company to Britain, blaming Germany‘s social security system, which pays the jobless up to 70 percent of their former salary.

“It is impossible to recruit the right sort of staff in Germany,” the Munich-born architect told London‘s Daily Telegraph. “If you advertise for a secretary, you might get seven applicants, but then nobody shows up for the interview, because they are better off claiming benefits and moonlighting.” According to the Telegraph, dozens of German firms are choosing to expand or relocate to Britain.

Twenty years ago there were 380 German companies operating in Britain, with a total investment of one billion D-marks. Today there are 1,600 German firms with a total investment of DM 45.8 billion. What attracts the Germans is the favorable economic climate, flexible business policies, and lower corporate and personal income taxes. Theodor Waigel, Germany‘s finance minister, revealed at Davos that German industry has been investing four times as much outside Germany as flows into the country from foreign sources.

Peter Webber, CEO of Technic Group, moved his entire retread tire plant from Germany to Burton-on-Trent, England, to escape the burden placed on his firm by the EU’s social chapter. The relocation was not made because the company is anti-Europe. It continues to export 80 percent of its product to the continent. But Webber found the labor rule restrictions too much for his nine-year-old company. He could not work his plant on weekends or after 6 p.m. Part-time workers had the same benefits as full-timers, and holidays were generous. The only way to combat the ludicrous work rules was to move the entire production. By contrast, his Burton-on-Trent factory runs 24 hours a day, seven days a week for most of the year.

The social charter, one is told at rarefied gatherings such as Davos, is not a competitive issue. And perhaps not—for huge companies that can afford it. Failure to implement welfare reform has convinced many bankers and business leaders of the hopelessness of structural change at home. The Allensbach Opinion Research Institute, Germany‘s oldest polling organization, has seen support for economic and monetary union rise dramatically among the country’s elites even as the rest of the population grows less and less enthusiastic. Bankers and business leaders hope the euro offers stability against currency speculation and a substitute reserve currency against the dollar. German industry seeks a relatively softer euro to ease exporting. The average German, however, is expecting the euro to be as strong as the D-mark.

Across Europe expectations are high. Wanting to safeguard his achievements, German Chancellor Helmut Kohl sees further integration with Europe as the only way to achieve it. The French are willing to have the euro on German terms, believing it can be rendered French in practice; the Italians welcome it in hopes of solving structural problems they cannot solve themselves, and Spain and Greece like the subsidies that the euro will not disturb.

Meanwhile, Britain faces an election in May in which monetary union and the consequences of joining the social charter will be at issue. Tony Blair, Labour’s candidate, who leads current polls, is in favor of ending Britain‘s opt-out position on the social charter, claiming it holds no threat to business. Meanwhile, Tory leader John Major hesitates to put the case before his countrymen and appears half-hearted when he does—which may partly explain his poor showing in the polls.

Clearly there are many objectives and expectations for Europe to reconcile. At present, there is arguably a market premium for de-Europeanizing in order to attain agility. Since 1994, for example, Frankfurt-based Hoechst—the world’s largest chemical company—has cut jobs in Germany by 44 percent to 45,000. It now has more employees in North America than in Germany. Such measures are uncharacteristic of the traditionally staid German industry, which tends to focus on job preservation at all costs. Yet Hoechst is not alone, and it is likely that other European companies will follow suit. In today’s global marketplace, it’s a move corporations can’t afford not to make.

Further economic and political integration for Europe appears inevitable. But on what terms? The region’s business leaders, if not its politicians, realize that the forces of the global marketplace are inescapable. Before the region stumbles into the future it needs an open debate on the choices ahead.

About JP Donlon

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