Commentary: Europe's Unfinished Business
By John Rossant
When that pile of $350 billion in freshly minted euros starts circulating on Jan. 1, 2002, Europe will take a huge new step toward becoming a truly unified single market. "Becoming" is the operative word here: The introduction of the euro will be a daunting exercise, but a lot more heavy lifting will be needed before Europe can become a genuine continental market.
Sure, having the same currency in Copenhagen and Lisbon is good. But it's not enough. If companies have to operate with wildly differing pension schemes, labor regulations, and legal frameworks, Europe will simply not be as attractive a place to put capital to work as the U.S.
On paper, at least, there are attempts to remedy the situation. Proposals for common European company statutes, patents, and consumer protection statutes have been churning out of the European Commission in Brussels but are stuck at various stages in the European bureaucracy. "The problems are known," says Jean-Paul Betbeze, chief economist at France's Credit Lyonnais. "It's just a question of speed."
The key issue of pensions is one good example. Due to the myriad of national pension plans and provisions among the European Union's 15 members, a multinational simply cannot freely send employees where it needs to across Europe. An Italian, say, may balk at working in Britain because the pension scheme might be less generous. In some cases, employees could be slapped with two taxes on their pensions. And companies that operate in different European countries cannot run their pension plans in a unified way, making it an advantage to operate in the U.S.
The patchwork pension schemes across Europe produce additional costs for more than just the companies or individuals involved. Because pension funds don't operate across the whole of Europe, the pension-fund portfolio investment schemes are inefficient. Some countries require the funds to invest fixed amounts in government securities or in national companies. "The result is that European capital markets are [less] fluid and efficient" than they could be, says Matthew Brooke, economic advisor at Brussels-based Unice, the confederation of European employers' groups.
Attempts are being made to address the problem. A draft EC Directive on Regulation of Institutions for Occupational Retirement Provisions -- i.e., pension funds -- was recently approved by the European Parliament, but is now stuck in the intergovernmental Council of Europe. Among other things, the directive would enforce mutual recognition of pension funds across Europe and give funds the freedom to prudently invest where they see fit. Many are hoping the directive will finally be approved during the Spanish presidency of the EU, which kicks off in January.
Another area in which Europe needs to become more flexible is labor market regulations. France, for example, has been rigorously enforcing its controversial 35-hour work week. And under the center-left government's recently passed "Social Modernization" legislation, already tough rules governing the ability of companies to lay off workers are being tightened. By contrast, Britain, Ireland, and the Netherlands have much freer -- and much more dynamic -- labor markets. A more open system will be needed if Europe hopes to bring down high unemployment levels.
The absence of a level playing field hurts in other ways. Although there are plenty of cross-border mergers and acquisitions in Europe, large swaths of industry remain stubbornly national -- despite efforts by the European Commission to break up national monopolies. In France, for example, state-owned Electricite de France controls 95% of the national market, compared with 26% state control in Finland and 45% in Spain. National telephone companies, whether privatized or not, almost invariably hold upwards of 80% of any given national market. That makes for higher prices in some countries, poorer service, and ultimately less efficiency.
Competing national regulators also make it more difficult than it should be for companies to tap capital markets. There is no common European prospectus for new issues -- at this point, there are just plans for one that can be accepted throughout the continent. And accounting principles differ across Europe, even with many companies migrating to American standards. Despite promises by incoming EC President Roman Prodi to introduce legislation setting up a European company statute viable throughout the EU, almost nothing has been done.
Often, it is an uphill battle in the face of national resistance. National central banks, for example, have lost their ability to set interest rates and to issue currency -- but that seems to make them keener than ever to regulate and to defend their remaining prerogatives. The Bank of Italy and the Bank of France, for example, keep an eagle eye over their national banks, protecting them from foreign predators.
The euro will do much to change habits around Europe. Business will be somewhat easier to transact. But don't expect it to kick off a seamless continental economy. Even euro-optimists think that will take years.
Rossant is BusinessWeek's European regional editor
Edited by Frank Comes
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