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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.

While all eyes are on the euro, the single currency that is set to launch on January 1, 1999, a widening debate is under way on the structural and market reforms that need to be implemented if European Union is to reach its full potential. At a CE Forum, cosponsored by the Netherlands Foreign Investment Agency and Tandem Computers, held recently in San Francisco, Dutch Economic Affairs Minister Hans Wijers outlined a number of EU initiatives such as the Stability Pact, for Bay area CEOs. Roel Pieper, former CEO of Tandem, now a unit of Compaq Computer, offered an IT-based strategy for North American firms trying to maximize their EU direct investment. Recent events demonstrate how tricky it is for European ministers to hit their targets. Since the forum was held, France upset plans for the future governorship of the European Central Bank by proposing its own candidate, Jean-Claude Trichet, president of the Bank of France.

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 (Netherlands Government): There’s an enormous process of restructuring, consolidation, and specialization going on in Europe. Looking at the headlines in the papers, you might get the impression that Europe isn’t making progress. But if you compare the Europe of today with Europe five or 10 years ago, we are making enormous progress. If you take into account that this is not a green field operation, and that these cultures-and countries-which have existed for centuries are actually integrating their economies, you will see what an enormous force you are talking about.

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 Europe.

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 Europe. It’s incredible. At least eight countries meet the criteria of the Maastricht Treaty. In 1994, my country had a budget deficit that was far above the 3 percent, and next year we will have a budget deficit of 1.75 percent of GDP. We had a debt-to-GDP ratio of about 84 percent; we will end up next year near to 7 percent. Our inflation is under 3 percent, our interest rate is competitive. At the same time, we reduced the tax burden for our citizens and companies by 2 percent of GDP.

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 Germany than in the Netherlands. Now it’s exactly the opposite.

Look at the U.K., Ireland, and some of the Scandinavian countries. Sweden had an enormous budget deficit in 1994. They expect a surplus or near zero this year. So there are countries in the EU that are dynamic and competitive.

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 U.S. if you had 52 different currencies per state, with each changing all the time.

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 U.S. during the last 50 years, you will probably see great differences in growth rates and in income. So it’s possible to have one currency and at the same time have substantial differences in economic performance.

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): Germany, France, and Italy are growing at a rate of 1 percent, while Ireland is at 7.3 percent and Finland at 4.7 percent. How long can that continue?

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 Europe we are in the process of converging those kinds of policies.

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 Germany for this reason.

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 Europe, it’s likely it will be less restrictive, not more so. The question is, if you enter the euro, should you enter into social security systems or regulation kind of systems that make your economy less competitive?

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 U.K. with a separate Scotland, regions in Italy that are demanding their independence, and Catalonia in Spain.

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 U.S. to equal-and my grandchildren will see one nation called Europe. The euro concept is difficult for me to conceive for the simple reason that currency control is the fundamental substructure of every nationalistic government in the world, including ours. The ability to prop up the economy, reduce labor strikes, and change interest rates is fundamental to a government’s staying in power.

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 Atlanta does well, everybody moves to Atlanta, and when it’s terrible, they don’t. But I don’t associate Europe with that.

Wijers: Long-term unemployment in Europe is concentrated among people with low productivity levels, often because of this kind of mobility situation. It’s because our social security system provides an income level that does not give incentive to go to countries where there may be sufficient jobs. We try to find a balance in Europe between being tolerant, being humane, and also being economical. We will probably have to answer in years to come about that issue.

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 U.S. and Europe are heading towards the same point from different directions. There are efforts being made to push some of what the U.S. government does back to the states. Welfare’s a good example. We’re both sort of converging. Maybe we can learn from one another.

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 U.S., doing business in Europe. At the beginning, we all saw the EU as a trade barrier as opposed to an opportunity.

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 Netherlands will work with the U.S. government for uniform commercial code for electronic commerce, creating a seamless global marketplace without access barriers.

Jim Mastandrea (First Union): Typically public companies are driven towards low capital costs. With the currency united, and greater competition for European capital, do you see that lowering the overall cost of capital?

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 Europe will become more competitive. Financial services in Europe are still very much local, national markets. We will see an increasing cross-boundary competition in the financial services market in Europe, so there’ll be increased competition, which leads to lower costs.

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 Europe, you need multiple operations in multiple countries, staffed by non-Americans. Putting Americans in local countries doesn’t work. Make certain a Parisian runs Paris and a German runs Frankfurt.

We now have one human resources department and one logistics department for all of Europe, whereas three years ago we didn’t. You have to mix pan-European behavior with local implementation.

Horwitz: What troubles me a great deal is that you are considering inviting relatively unstable governments, such as Poland, Estonia, and Cyprus. Doesn’t that run the risk of endangering your concept?

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 Spain only 15 years ago and Spain now. Spain is becoming a very competitive economy. For the countries you’re talking about, they may join the EU, but it may be 20 years before they join the euro.

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 Netherlands, our preference is to do it within the context of WTO because then you don’t exclude anybody. You make the world difficult for businessmen if you have a patchwork of regional trade agreements that sound good but create lots of entry barriers.

Donlon: In the U.S., we can compensate performers through stock options and other devices that cannot be used in Europe because of the tax penalties. Where will entrepreneurial spirit come from in Europe if not through incentives?

Pieper: In Europe, it’s more a culturally driven than a structural mechanism. It is tied to the whole notion of venture capital. It comes together, and it’s like a center of activity that keeps on growing and reinventing itself. Silicon Valley started with a few successful companies. They had money, so they invested; then they became more successful and invested again. And that grows and gets into the academic circles and cultural circles.

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 Minneapolis, MN.

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 Irvine, CA.

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 Netherlands.

Roel Pieper:

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.

The Netherlands, for example, has the highest density of PC users-at home and in business-and the highest expenditure of IT technology per business employee in the world. So the infrastructure is there.

 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.

About J.P. Donlon

J.P. Donlon
J.P. Donlon is Editor Emeritus of Chief Executive magazine.