EU: Countdown to Convergence
How quickly is Europe proceeding toward the single currency promised for 1999?Faster than you’d think, given the difficulty of forging synergies between 15 countries with changing governments and coalitions.
December 1 1997 by JP Donlon
While all eyes are on the euro, the single currency that is set to launch on
The move casts doubt on the German-brokered choice of Wim Duisenberg, the Dutch chief of the ECB forerunner, the European Monetary Institute.
Hans Wijers (
We are creating international synergies between 15 countries with changing governments and changing coalitions. Just try to bring 15 companies together with different portfolios and different CEOs who speak different languages. And then look at
In 1992, we had this idea of achieving an internal market with the same standards in all European countries-an enormous market of 250 million people that will actually expand to 340 million people. We defined parameters, the most important of which were a budget deficit of under 3 percent; a state debt of under 60 percent of GDP or, if higher, one showing a consistent and credible decline; and inflation of under 3 percent. It was an enormous ambition, if you think about where we were at that moment. The Maastricht Treaty said that countries not meeting those targets by the beginning of 1998 would not be allowed to enter the third phase.
Since then, there has been an enormous, interesting process of convergence of financial, monetary policies in
We have liberalized many of our markets, including telecommunications; we have one of the most flexible labor markets in the continent; and we have become much more cost competitive with other European markets. At the beginning of the ’80s, costs per industry per unit were 20 percent lower in
Look at the
In addition to the Maastricht Treaty, we have the Stability Pact, which makes it clear that countries meeting the third phase criteria will enter into the euro. Without sharing one currency, we would never be able to have one market. You could not have the internal market you have in the
By May 1998, a substantial group of countries will be meeting the targets. But countries don’t have a free lunch after they enter the third phase. Those countries will then have to work very hard to keep their economy competitive.
Herb Aschkenasy (Oregon Freeze Dry): If after monetary union, one country-say the Netherlands-emerges as the winner in terms of new industry and investment, how will this affect the methods by which the euro-which is everybody’s currency and not just the Netherlands’-is treated?
Wijers: If you look at the growth rates of certain regions within the
Harry Lund (Protein Capital): Surely that’s different. We fought a war over union. We’re now talking about monetary union without political union, when historically political union precedes monetary union.
J.P. Donlon (CE):
Wijers: Most economists agree that if countries are no longer able to use instruments of devaluation or reevaluation to adapt their economies, they will have to find adaptability somewhere else, through more flexibility in the real market-the product market, the labor market, and the capital markets. That means that in
So there is competition in effective policies among European countries, with those countries that are successful actually driving the others to accommodate their policies. There is a real policy convergence going on. It’s not a political union because we don’t have one foreign policy, one parliament, one government. We are far from that and will take decades to get there.
Arnie Pollard (CE): British CEOs, who have spent 10 to 18 years being That cherized, paid a heck of a price to make their companies lean and mean and more competitive. Many say they don’t want to be forced to give up ground painfully won. Why should they take the next step and be saddled with labor inflexibility and artificial costs that will make them less competitive?
Donlon: And it’s not just the British. Actually Hoechst, a German company, admits that most of its new investments are happening outside of
Wijers: This example makes it clear that countries can be part of the EU and have different levels of flexibility and expenses. Among European countries, there are substantial differences in the levels of minimum wages, the way labor market regulation is organized, and in the social security systems. I understand the worry of British CEOs. Yet surveys show that the majority of the British CEOs say, “We should join the union; we are part of the European economy.” The euro will be a strong currency, the second largest international currency, and the British cannot allow themselves not to be part of it.
If there is regulatory change in
Roel Pieper (Compaq): At the heart of all of this is how can European companies and countries, remain competitive with what’s going on in China, in Japan, in the U.S. and India, because other companies in other large economic regions will have those home market advantages, and European companies might not. And is the euro a stepping stone towards that goal or away from it?
Bud Steinberg (Carboline): It’s interesting that the individual countries that would be part of this union are facing schisms within their own countries. There’s the
Wijers: The regions in the future that will make the new EU are not necessarily the same as the countries that comprise the EU now. There are very strong regions in some countries that may actually survive as cultural entities much longer than countries whose boundaries were dictated by the consequences of historical incidences. In 20 years, there will be more regions than we have countries at this moment.
Louis Horwitz (Datum): If you can pull it off, this becomes sort of an economic and political miracle that you’d probably have to go back to the formation of the
Richard Vissers (CTS): There are many ways to equalize the situation and other ways to compensate for countries’ individual economic success than currency.
Aschkenasy: One of them would be higher mobility of both businesses and people. Here when
Wijers: Long-term unemployment in
Frank Quirk (Macro International): How much political independence will the European Central Bank have? All we have to do is have the Federal Reserve marginally raise interest rates and there are bellyaches in Congress. With 15 different countries affected by a strong central bank, what are the mechanisms will allow for the political reconciliation of competing concepts?
Wijers: That’s an interesting question. The French have tried to bring ministers into formal positions where they could advise a central bank president about the monetary policies and to a degree influence that independence. They never won.
Arthur Dahl (Northwestern Travel): In a sense, the
Marco Cruz (Superior Foods): My concern is not so much about the success of the EU, but how it will affect us, CEOs in the
Wijers: Since then, we have created the World Trade Organization, which just helped us liberalize telecommunications. It’s an enormous development. Tariff barrier increases are not conceivable; could there be non-tariff barriers? I do not see how, because what you actually get by creating one currency is less volatility of the different currencies within European markets. That brings greater predictability and reduced transaction costs, particularly if you have a multiple European business.
Donlon: What about standards?
Wijers: More countries are accepting that standards should be market driven. Most businesses are now global, and this community wants global standards. The
Jim Mastandrea (First
Wijers: Interest rates should go down for two reasons. The budget deficits will be down and the risk premium about the future will go down because there’s less uncertainty. Second, the financial markets in
Eric Spivey (NETCOM): We’re seeing barriers coming down from a government regulatory perspective, but not from a buying-behavior, customer perspective. Where can we go to examine best practices of European-wide marketing efforts? Because it still feels very different on a country-by-country level.
Pieper: Every country has its own behavior. Over time more similarities will appear in contracts, taxes, import and export behavior, logistics, and, hopefully, a European market will actually emerge. But never expect languages to go away; never expect buying behavior to become the same. For success in
We now have one human resources department and one logistics department for all of
Horwitz: What troubles me a great deal is that you are considering inviting relatively unstable governments, such as
Wijers: There’s a fundamental difference between those countries gradually entering into the European market and those countries entering into the euro. They will have to go a long way to be a full competing member of the EU. Look at
Cruz: Does the EU plan to expand free trade with other regions?
Wijers: The discussion that you see now is, how do you achieve that? Do you need to enter into regional agreements like NAFTA and EU or try it on a world scale? In the
Donlon: In the
The competitive countries of the future will need to think about how we can learn to build some of those centers of gravity where that behavior becomes normal, so that more “entrepreneurs” will step up and say, “Hey, I can do that.” And then it becomes a self-fulfilling prophecy.
A Who’s Who Of Forum Participants
Herbert Aschkenasy is president of Albany, OR-based Oregon Freeze Dry, Inc., a manufacturer of freeze-dried foods and pharmaceutical intermediates.
Marco L. Cruz is president of Watsonville, CA-based Superior Foods International, which specializes in global sourcing and distribution of produce.
Arthur Dahl is president and COO of Northwestern Travel Management, a travel management company based in
Roger G. Harker is president of Minden, NV-based Bently Nevada Corp., an international manufacturer of electronic instrumentation systems.
Louis B. Horwitz is president and CEO of Datum, Inc., a manufacturer of time and frequency products based in
Harry A. Lund is president and CEO of Protein Capital Corp., a Stamford, CT-based LBO firm specializing in dairy processing and other basic food products.
James C. Mastandrea is chairman and CEO of the Cleveland, OH-based First Union Real Estate Equity and Mortgage Investments, a real estate investment trust.
Roel Pieper is senior vice president and general manager of worldwide sales, marketing, service, and support at the Houston-based computer manufacturing company, Compaq Computer Corp., and the former CEO of Tandem Computers
Frank J. Quirk is president and CEO of Calverton, MD-based Macro International Inc., an international management consulting, research, and information technology company.
Sherwin (Bud) L. Steinberg is president of the St. Louis, MO-based Carboline Company, a subsidiary of RPM, Inc., which manufactures corrosion-resistant protective coatings.
Eric W. Spivey is president, international of San Jose, CA-based NETCOM On-Line Communication Services, Inc., an Internet solution-provider.
Richard Vissers is president and CEO of Orlando, FL-based CTS Corp., a software development company.
Kevin Wiese is CEO of Woodland Hills, CA-based Commercial Synergies International; strategic partnering, alliances, and coalitions worldwide.
Hans Wijers is Minister of Economic Affairs, the
Embracing Electronic Commerce
The transition from the industrial age to the information age, says Dutch-born Roel Pieper, senior vice president of Compaq Computers and former CEO of Tandem Computers, will bring a rebalancing of trade relations-and greater emphasis on electronic commerce.
As we look to American/European relationships, there will be a few countries that have the opportunity to stand out front, not only protecting and leveraging their existing positions, but also demonstrating a leadership role in embracing new ideas.
In the industrial age, we measured value in money, gold, and real estate. But in today’s information age, value will shift from gold, silver, real estate, and currencies more toward information, knowledge about markets, consumers, and competitors.
This will cause an adjustment of trading relations and bring opportunity-as well as risk of dislocation. And as that pattern gets adjusted, we’ll see new winners and new losers.
Part of that transition involves electronic commerce, one of the big opportunities for new players to dislocate existing players and/or countries by providing or buying and products and services. At the same time, growing economies around the world are on a path toward more service-based economies. There’s no doubt that there is a link between the information age, electronic commerce, and service-based economies. That’s where those companies and those countries that have the courage to step ahead into this new age can protect their existing positions and actually strengthen them.
I believe that all trading relations between companies, consumers, countries have both the up side and the down side in this rebalancing of value, electronic commerce versus commerce. The winners will be those that treat electronic commerce not as voodoo, but simply as new things they can add to what they do today.