Cover Story -- Ten Years after the Wall
Europe: Ten Years after the Wall
A decade after the fall of the Berlin Wall, the Continent is changing at a breathtaking pace
Only 10 short years ago, just 120 months. And already it seems like another era, another epoch. And it was.
Take Checkpoint Charlie on Friedrichstrasse in the center of Berlin, in the heart of a once-divided Europe. Until Nov. 9, 1989, it demarcated a world that now seems far away: the East German klieg lights, the fearsome Todesstreifen, or "death-strip" of no-man's-land, and most of all, that relentless stretch of 13-foot-high reinforced concrete--the Berlin Wall. The Wall was a stark symbol of the 20th century, of the horrors of its world wars and the clash of its ideologies.
Look at this intersection of Friedrichstrasse today. A resplendent Berlin is once again the capital of a united Germany. The Wall has been swept away, as have the barbed wire and the guard towers. Long forgotten are the trigger-happy East German border guards and the growls of their police dogs.
And exactly where the grim checkpoint once stood, a new building is about to rise: Berlin Checkpoint Charlie Plaza, an ultra-modern eight-story office tower that promises future tenants the latest in high-speed data connections. "For information," a big sign says in English, "see our Web site: www.Checkpoint-Charlie.com." If ever a metaphor were needed for the world's technological and political transformation in the past decade, it might be that very sign.
The fall of the Berlin Wall not only heralded the extraordinary collapse of the Communist order from the Elbe to the Urals, a system that once seemed both monolithic and eternal. It also symbolized an epochal turning point for the West--and Western Europe in particular.MENTAL BLOCKS. It was nothing less than the end of the old Europe. Also collapsing with those 66 miles of concrete were the many mental and political barriers built up over the Cold War. "The fall of the Wall set off forces in Europe which were unprecedented in history," says Raymond Seitz, Assistant Secretary of State for Europe in 1989 and now vice-chairman of Lehman Brothers Inc.
Make no mistake: The 21st century may formally begin on Jan. 1, 2000, but in terms of a fresh way of looking at things, the new century kicked off on Nov. 9, 1989, when thousands of jubilant East Berliners breached the Wall that had long divided their city.
Now, 10 years later, a new economic and political architecture is emerging from the rubble. The result is a much more vibrant and pluralistic Continent--one in which the state is no longer the final arbiter of society. The driving forces are technology and business, rather than ideology and geopolitics. Businesspeople, artists, local officials, and not the least, entrepreneurs, have overtaken national politicians as the Continent's key decision makers.
It is they who will have to confront the next decade's greatest challenge: truly integrating the former East Bloc countries into the European fold. The political pressure is now clearly on to bring in countries such as Poland, Hungary, and the Czech Republic within the next five years or so. But enlargement could not only create economic tensions as poorer, less efficient economies join the European Union; it also stands to change the very nature of Europe by moving the center of gravity further east.
Some see a silver lining, pointing to the spectacular economic success enjoyed in the EU by such former economic basket cases as Ireland and Portugal. Central Europe has sophisticated and well-educated populations and pent-up consumer demand. "In many ways," says Dirk Hurdig, secretary general of UNICE, the European employers' federation, "Central European countries are better positioned than Asian tigers."
Back in the wealthier West, the battle for a new Europe is not over. Labor markets are still rigid, so workers tend not to go where the jobs are. The welfare state remains fiercely protected by politicians, trade unions, millions of voters, and vulnerable businesses that fear a completely free market. Germany itself is now a key battleground. Europe's largest economy, which has spent $560 billion on reunification, is now struggling with the need to cut back social spending to make its economy more competitive. In the East, meanwhile, even the strongest economies have yet to build the legal framework needed to protect investors and workers from the worst excesses of unbridled capitalism.
For millions in Europe, it's an understandably frightening new world where jobs can be easily lost and the old certainties have vanished.
But the momentum of events unleashed in 1989 keeps dictating change, while new communications technology has been accelerating the pace. Central Europe's opening made millions of skilled, low-cost workers available to Western companies seeking new bases of operation and new markets. With the forces of globalization at Western Europe's doorstep, workers in France and Germany could no longer rely on protection from cheap Asian imports, especially with Czechs and Poles hungry for work just a few hundred miles away.
The fall of the Wall also hastened the unification of Western Europe. Of course, Europe's political leaders had already been groping their way toward greater unity before 1989. By the mid-1980s, much of Western Europe had already embarked on pushing through a single market. And Spain and Portugal finally joined the European Community in 1986.
But the Wall's collapse galvanized the entire Continent, accelerating a united Europe as nothing had before. With the sudden crumbling of the Cold War's iron certainties, Europe needed new reasons to hang together. And with Germany reunified, other Europeans had to be quickly reassured of "a European Germany rather than a German Europe," as then-Chancellor Helmut Kohl put it. Despite German voters' deep skepticism of a plan to do away with their stable Deutschemark, Kohl threw his prestige behind European Monetary Union. He and other Western European leaders had already been negotiating an agreement that would lay out the framework for economic union. In short order, they inked the historic Maastricht Treaty of 1992. By January, 1999, the euro, Europe's common currency, was born.
In a few short years, the factors dominating European political and economic life had completely changed. The need to prepare for monetary union forced governments to tackle their budget deficits. And as the threat of Soviet-led communism disappeared, the politics-as-usual of the old Europe went through a profound transformation.
In Italy, where the West's largest communist party had been shut out of power for four decades, successive Christian Democrat and Socialist governments had created institutionalized corruption. Now, crusading anti-corruption judges like Antonio Di Pietro could go on the offensive without exposing the country to a communist takeover. Di Pietro was soon snaring powerful politicians like ex-Prime Minister Bettino Craxi. By 1994, an entire generation of Italian politicians was forcibly retired. Likewise in France the anti-corruption drive started to expose the shady dealings of the government and business elite.
As the old politicians have faded from the scenes--and with them, Europe's clubby, old-boy capitalism--younger ones have emerged willing to give market forces freer play. That has set the stage for unprecedented market deregulation and privatization. Even if the many center-left leaders disguise this creeping Thatcherization by calling it "flexibility" and "freeing up resources," there is no mistaking the effects. France, which nationalized the commercial banking system in 1982, had made a 180-degree turn by 1991. Banks, manufacturers, and insurers have all gone on the block.
Italy has witnessed perhaps the most dramatic shift. It started the 1990s with 90% of its banking system and 60% of its economy in state hands. Now, as the decade draws to a close, most banking is in private hands and almost all state industry has been sold off. In economic terms at least, says Carlo De Benedetti, the former chairman of Olivetti, "Italy was probably the biggest beneficiary of the fall of the Wall."
With the adoption of the euro last January, the full impact of 1989 is in some ways only now being felt. "After the Wall," says Marco Tronchetti Provera, chief executive of tiremaker Pirelli, "the single European market became a possible reality. And in the last 24 months, it has become reality."DEALS, DEALS. Thus companies are swiftly knitting together a real Continental economy. Mergers and acquisitions are remaking the corporate landscape. The value of deals is approaching $1.3 trillion this year, up fourfold from five years ago, according to J.P. Morgan & Co.
Once politically sacrosanct sectors are fast opening up. Since deregulation two years ago, the telecoms industry has become a no-holds-barred battleground. In October alone, Germany's Mannesmann launched a $32 billion buyout of Britain's Orange PLC, while France Telecom ponied up $9 billion for a chunk of Germany's E-Plus Mobilfunk.
The ferment in business has produced a new icon in Europe: the CEO. From DaimlerChrysler's Jurgen Schrempp to French media mogul Jean-Marie Messier, corporate chieftains swagger like rock stars in today's Europe. Old-guard politicians like France's late President Francois Mitterrand were once masters at courting such attention. Today, "the heroes are entrepreneurs going to Silicon Valley and making it big," says French political scientist Dominique Moisi.
Another upstart on the scene: the shareholder. Now that many European equities are traded in euros--not local currencies--it's much easier for institutional investors to compare stocks and figure out which managers are lagging behind their peers. From the CalPERS pension fund to unit trusts based in Edinburgh, fund managers are pressing for the returns--and the kind of corporate governance--that once could only be gotten on Wall Street. "My capital is now diversified, and I've got institutional shareholders in places like the U.S. and Britain as well as France," says Thierry Desmarest, CEO of French oil giant TotalFina. It was those shareholders--and not the French government--who threw their firepower behind Desmarest's successful $44 billion bid last July to take over rival French group Elf Aquitaine.
Desmarest, who also engineered the first big cross-border takeover in Europe's energy industry, is quick to acknowledge that in Western Europe today, borders simply matter less. Of course, multinationals such as Unilever, Citibank, and Royal Dutch/Shell Group had long pursued global strategies. But after the Wall came down, "the leading 40,000 corporations made the significant discovery that the world was now their oyster. Political inhibitions simply didn't exist anymore," says Jonathan Story, professor at Fontainebleau-based INSEAD. The result of that sea change has been an explosion in cross-border investment. According to the U.N.'s World Investment Report issued last August, total foreign direct investment flows rose from $90 billion in 1992 to more than $400 billion this year.
Big companies in Europe are not the only ones enjoying newfound freedom. Smaller outfits, especially in high tech, are starting to multiply. With the rising popularity of the Neuer Markt, Internet stock offerings are multiplying--and changing the mind-set of a new generation. Engineering grads, turning away from safe bets such as Ericsson and Siemens, are launching their own outfits. "Most of my classmates are looking for investors," says 25-year-old Jacob Hamacher, CEO of Ehand, a Stockholm mobile telephony startup.
People like Hamacher show that there's also a generational effect at play. With the end of the Cold War and its nuclear doomsday scenarios, young people no longer dwell on the limitations of history. The Wall "influenced my entire existence," says 52-year-old German economist Hans-Werner Sinn, a top authority on events leading to its collapse. Today, his students at the University of Munich are indifferent to the events of 1989. "They are the Internet generation, the generation that is traveling everywhere," says Sinn. "It is a new world."RED FLAGS. Well, not entirely. The forces of pre-1989 are still playing a role. The hard-left French Communist Party can still bring out 50,000 protesters in central Paris, as it did in a mid-October demonstration to push the government to create jobs. More hammer and sickles and red flags floated down Boulevard Haussmann than are ever seen nowadays in Moscow.
Germany shows the ambivalence many Europeans feel about the world they have created since 1989. The country courageously embraced the challenge of reunification. But no one in the political class dared to push for an economic revolution to accompany the political one. Instead, Germany has largely preserved its old economic model at a time of global change. "We spent billions trying to build an old-style industrial economy in East Germany," says Hasso Plattner, chief of German software giant SAP. "Meanwhile, America was building a whole new economy in California." This represents a huge opportunity lost.
Yet the impact of the Wall's collapse on European attitudes has been so tremendous that, for the first time, there is hope for even more radical change. The consequences of 1989 are still being felt, and in some respects, Europe cannot afford to stay put. Its governments are slowly running out of money to support the old welfare state, and taxes cannot get any higher. Perhaps the only alternative is to widen the economic and political freedoms still gaining strength. More cross-border mergers, more market-opening moves by governments, more opportunities for restless entrepreneurs and politicians who want to break with the past: These are all part of Europe today. The first decade was just a start.By John Rossant in Berlin, with Bureau ReportsReturn to top