The Pace of Economic Change in Europe

But, as usual, the news from Europe is diverse and complex. It is not always easy to get a clear picture, simply because Europe is such a very complicated place. There are many different Europes to talk about. The east is not yet like the west, the north is in many ways different from the south. There is the European Union, with 380 million people. There is the hard core of Euroland, the zone of monetary union, with 290 million. There is the EU as it will be after enlargement, with perhaps 550 million people once Turkey is included, which is now the policy.

And there are two other Europes I would like to mention. One is the Europe you often read about in the press, especially the English language press—a Europe which seems to stumble from crisis to crisis in such rapid succession that you might be surprised to find that there is anything left at all. The other is the real Europe in which I live and work, a Europe which is more and more prosperous, successful, and changing all the time.

The Strengths of the European Union
Let me focus for a moment on the EU. The fifteen member states form an economic bloc which is roughly the same size as the United States. It is a rather bigger player in world trade, but somewhat smaller in world financial markets. Its people are well educated and it is technically strong in a whole range of industries, from large civil aircraft to mobile telephones, from banking to telecommunications, not forgetting my own special interests, which are chemicals and pharmaceuticals. And we have three special assets which are not always fully understood by the outside world.

One is the strength which comes from diversity. We Europeans are brought up to live and work in a multilingual, multicultural environment, we have to learn how to manage different attitudes and different preferences, all of which is in many ways an ideal preparation for the complexities of the global economy.

A second is that our very diversity makes us extremely self-critical. We watch one another carefully, we are quick to criticize one another, quick to propose solutions, impatient when they are not applied as quickly as we would like. Perhaps we sometimes overdo this self-criticism, but in a changing world I believe it is a strength.

The third point is the extraordinary pace of change in Europe. The EU is continually reinventing itself, it has changed out of all recognition since the great turning point, when Jacques Delors launched the 1992 single market program in 1985. And now, the common currency, the Euro, since January 1999, has had dramatic positive effects.

The Year 2000—A Good Economic and Social Year for Europe
There is general agreement among the forecasters that the year 2000 prospects for the EU economy are looking good, better than for many years.

• Economic growth is speeding up, and will probably top 3 percent this year, gradually closing the gap with the U.S. and well ahead of Japan.
• Exports are also running well ahead of either the U.S. or Japan, and the EU external account is well balanced, especially when compared to the large and persistent U.S. deficit.
• Unemployment is much too high but has come down steadily from 11 percent to 9 percent and this reduction will continue.
• Inflation is low, still below 2 percent a year, and the upward pressures are for the moment less than in the U.S..
• The regular surveys show that both industrial and consumer confidence are high and rising, while investor confidence is well illustrated by the strength of European stock markets, which have outperformed most others over the past twelve months.

Monetary Union
Besides the good 2000 economic and social prospects, a major change is taking place in Europe. The Monetary union is the spearhead of the integration and change process. The launching of the euro in January 1999 for eleven out of fifteen countries, the creation at a stroke of the world’s second most important currency—was a great technical success as well as a remarkable political commitment. Even before it was launched it had very beneficial effects through the pressure exerted on every government to reduce deficits and to put its public finances into better shape.

The fact that the dollar has risen by 15 percent against the euro in the first year is a tribute to the current dynamism of the U.S. economy rather than a mark of any deep-seated problems in Euroland (we all know that currencies do swing up and down over time), and as chairman of an exporting company I do not complain about the useful short-term stimulus which we have received.

What matters in the longer term is that we now have our own strong, independent, and professionally managed European Central Bank with an overriding commitment to monetary stability as the basis for sustained growth. The euro has become the leading currency in the international bond market and is opening the way towards a unified equity market which is attracting more and more international investors. The Euro, which is now used by all big businesses, will be replacing eleven—and perhaps thirteen—European currencies in the hands of consumers in January 2002.

Political rejuvenation
In parallel with these economic and monetary successes, the political integration of Europe has also speeded up. There is a spirit of rejuvenation in the air, there are new faces around the table. Schröder, Chirac, Jospin, Blair, Aznar, D’Alema, and Verhofstadt have taken over the reins of government from the generation of Kohl and Mitterrand.

These new leaders have made an extraordinarily bold commitment to enlarge the EU from fifteen to twenty-eight member states, which will bring fundamental benefits to the whole continent, both east and west, and the negotiations are advancing. They have also decided to develop a foreign and security policy so as to exert a greater weight in international affairs under the leadership of Solana, who came from Nato to become Secretary General of the European Council of Ministers. The first European military regiments called Eurocorps have been created and are operational, which would not have been thought possible even two years ago.

This spirit of reform extends to the European institutions, driven by the former Italian Prime Minister Prodi at the new and more powerful European Commission. The Commission plays the lead role in many areas of economic importance and it is extremely open to the business community, so that when businessmen like me face an issue that needs political input we have access to excellent Commissioners such as Monti for competition, Lamy for world trade, and Liikanen for electronic-commerce and industry.

This is in addition to our normal and regular contacts with national ministers, but it is fair to say that the Commissioners usually have a broader view because they are responsible for fifteen countries not one, and they have to negotiate as equals with the U.S., Japan, China and other large regional organizations. We have real confidence that they will do their best to make the EU work properly and to defend European interests in international negotiations.

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All these elements—economic, social, monetary, political—concur to give in Europe a feeling of rejuvenated confidence. Times have changed since the European feelings of europessimism in the ’80s and of shame during the Yugoslavian wars of the ’90s.

I have deliberately emphasized some of the positive features of Europe in 2000. But it would be wrong to suggest that everything is as we would like it. Let me highlight some problem areas where Europe is still weak and were many changes are urgently needed. They are being discussed and negotiated. They are the keys to European successes ... or failures between 2000 and 2005.

Taxes and labor costs
If unemployment is much too high in Europe, this is partly because of inadequate growth rates in recent years, when Europe has run significantly behind the U.S. But it is even more because the costs related to employing people are also much too high. Wages are burdened by huge tax and social security charges. A blue collar worker who costs his employer 100 receives less than 50 in his pocket, net after tax, on average for Europe.

This factor is much worse than in either the U.S. or Japan, and it is even worse for managers and other senior employees. Total tax and social charges in the EU are 47 percent of GDP compared with 34 percent in the U.S., which makes for a cost differential that is too high to be supported and represents a major barrier to European global competitiveness.

Moreover, if you hire people for a business venture that does not succeed, then it is both difficult and expensive to terminate their employment. In such an environment you can understand that employers are discouraged from hiring more people, and skilled managers hesitate to go independent by creating their own small firms and taking on their own labor.

Politicians understand all this but find it difficult to act in the face of opposition from organized labor. There is a general preference for a high degree of social protection in Europe. Many employers like me share those reasons and are favorable to the social dialogue, but we do press for improvement.

The European Round Table of Industrialists published a paper earlier this year calling for a switch in pension financing to capital funds based on savings and investment rather than “pay as you go” charged against salary taxation. Pension reform is urgently needed on the continent, but there is huge union and political opposition, although the example exists in UK, Ireland, and Netherlands.

Bureaucracy
The excessive weight of taxation is also a consequence of European bureaucracy. Part of Europe’s historical legacy is the centralized nation-state: rigid, protectionist and prone to excessive regulation. That is where the core of our bureaucratic problem lies, not in the new Europe that we are building today.

We are now succeeding in breaking down that inheritance through a double revolution that is taking place in Europe.

On the one hand we are reducing the power of the state and of the public sector in general through privatization and deregulation. In this we are helped by the fall of communism and the rise of the new information and communication technologies.

On the other we are transferring many of the nation-state’s powers to a more modern and internationally-minded structure at European level. European unification is progressing and it helps international businesses like ours.

But none of this happens overnight. It does not happen without friction and resistance. How could it be otherwise? In every member state there is a lobby against European unification, struggling to defend the vested interests, clinging to “the old way of doing things,” and blaming Europe or “Brussels” for the difficulties we encounter. You find this among some trade unions, some politicians—especially on the extreme right and extreme left—and some national civil servants. While business usually embraces the European integration process, the national public services resist the new ideas in principle or seek to regulate them at national level. Therefore, political leadership is necessary for negotiating among fifteen countries the new political decision process. Another Inter-Governmental Conference (IGC) is now taking place which will probably lead to a Treaty of Nice later this year. It should improve the EU structure and decision making systems, with more use of majority voting and a more rational distribution of voting rights between the fifteen countries. If we do not succeed, we will not be able to enlarge from fifteen to twenty-eight countries, and we will carry on being overburdened by taxes and over regulated at all levels: municipal, regional, national, and European. We are building not only a bigger Europe, but also one which will be better managed, more open, and more effective.

Competitiveness by Innovation and Business Restructuring
Competitiveness is a major issue in Europe since the ’90s. In the early ’90s, the single market program had forced strong European competition. The deep European recession of ’93 due to the German unification, had aggravated the need for business restructuring. Re-engineering and downsizing were able to reduce costs and improve somewhat international competitiveness. But the U.S. did not wait and increased its productivity by a leap forward in new technologies. European businesses are focusing now also on innovation, entrepreneurship, venture capital, skilled labor, and e-commerce. Most European politicians and civil servants begin to understand that competitiveness is the condition and not the enemy of employment and social cohesion. You only have to look at the agenda of the European Summit in Lisbon in March: “The Special European Council on Employment, Economic Reforms and Social Cohesion—Towards a Europe Based on Innovation and Knowledge.” The European Round Table of Industrialists and our Competitiveness Working Group were very much involved in the preparation of the Summit. The output of the summit was explicitly directed towards “urgent structural reforms,” including labor markets, social security systems, competitive markets, research and development, and e-commerce. The political leaders of Europe have made a clear analysis of the issues, several good recommendations, and a program of action. They must now implement them, speedily and effectively.

Simultaneously, the markets force change and business restructuring. The Vodafone take over of Mannesman is only one example of a new kind of European business behavior: A young English new technology company is taking over a dynamic traditional German company. Such events take place more and more often in all sectors: in banking and insurance, in media and telecom, in oil and gas, in chemicals and pharmaceuticals, in electricity, in retailing, etc. Companies continually review strategy and structure, focus on their core strengths, and seek mergers in order to become more European and more global. This process is favoured by stock markets which play a growing role. European equity markets have changed dramatically in the last months. We will see a lot more cross border mergers. Some of our European stock markets themselves are interconnecting with one another, some are merging. National protections are replaced by European integration.

Conclusion
One prime result of this constant pressure for change, driven by the need to compete in world markets, is that the old ideological divide has faded. Socialist and social-democrat politicians are to be found in twelve of our fifteen national governments and they have come to realize that their own priorities of social cohesion and employment are dependent on the competitiveness of the European economy, and they are all moving on a reform path—some more quickly than others, of course. Rather than party politics, our major problems today are bureaucracy, resistance to change, the inefficiency of the public sector, and, before all, the excessive defense of national prerogatives. Will they outweigh the pressures from the liberal ideas, the international processes and the new technologies? I do not think so because globalization, markets, and youths are on the side of European change.

I have shown you the two sides of the coin. I have exercised the European habit for self-criticism. We have many problems. We are acting on them. But the positive forces strongly outweigh the negatives.

It is not difficult to foresee a good year 2000 for Europe. But it is even more important to look ahead five or even ten years and to consider the real possibility that these positive forces will achieve a cumulative effect: a European Union of 500 million inhabitants, sharing the world leadership with the U.S., Japan, China, and some others.