Commentary: Free Markets in Europe: A Tougher Sell Than Ever

To most Americans, the headline on the front page of France's leftist daily, Libération, on July 23 would be anything but funny. "Faut-il brûler la Bourse?" the newspaper asked. Loose translation: "Should we burn down the stock exchange?" That headline ran in the midst of a losing streak that has shaved 40% off the Paris Bourse in just eight weeks, a sickening plunge the French have rarely experienced. No wonder the question posed by the paper showed a certain Gallic hostility to the market---a hostility Americans haven't faced in years.

Libération was joking, of course. But jokes have a way of getting at darker truths, and this one is dark indeed. Over the last 10 years or so, Europe has moved ever closer to what it calls the Anglo-Saxon model, with its accent on equity markets, deregulation, and privatizations. And a huge surge of transatlantic investment in the past decade intertwined the fates of European and U.S. companies more tightly than ever. But Americans and Europeans both know that antimarket sentiments still run deep across the Continent. Just look at the recent general strikes in Spain and Italy over relatively minor changes in labor laws. Now we seem to have the ultimate capitalist debacle, a disaster sure to arouse the ire of the European Left. If the meltdown leads Europeans to reject the U.S. model, then Americans would lose their biggest free-market partner.

The Great Slo-Mo Crash of 2002 definitely complicates the cause of free-market capitalism in Europe. But it won't end it, for the simple reason that Europeans need the markets as much as Americans do, and they've gone too far down the liberalizing path to turn back.

Without a doubt, individual Europeans are frightened by collapsing stock markets--even if, as France's new Finance Minister Francis Mer points out, the low level of stock ownership in Europe means the macroeconomic fallout of the crash will be more limited than in the U.S. "I bought Deutsche Telekom shares and then invested in a mutual fund," says Heidi Wagener, a 52-year-old hotel owner from Frankfurt. "I expected to make money but I've ended up losing it. Of course, I'm disillusioned." Meanwhile, the rise in bankruptcies and bad debts has killed hopes that the corporate bond market would take off anytime soon. And plans to privatize pensions are hampered or delayed. "The crash makes it harder to convince the unions and ordinary people that private pensions are the right solution," says Noel Goutard, chairman of Paris-based auto parts giant Valeo.

Yet the American model will still play a role in Europe. What, after all, could Europe go back to? The Left, though it can still field demonstrators, has been sapped of its strength. Communist parties have collapsed in Western Europe. And Socialist-led regimes have been voted out, first in Italy, then in France, and soon, most likely in Germany.

Besides, while individual investors are turned off, Europe's governments, whatever their political coloration, are totally hooked on the markets. Governments raised billions by selling stakes in telecoms and other giant companies. The politicians have spent that money, and now need to privatize more assets. They cannot borrow much more or hike taxes further. The privatized telcos, meanwhile, are loaded with debt--assumed partly to buy new mobile licenses from the government--and need to raise new equity.

One way or another, Europe's governments and big companies must stick with the American model. What could help? If U.S.-style capitalism becomes more palatable by turning more--well, European. Americans are talking about reducing the effect of options, and of knocking CEOs off their pedestals. Sounds right to the Europeans. Says Jurgen Kluge, Dusseldorf-based director of McKinsey & Co.: "Our model now looks good: the boring CEO whose compensation is not linked to share price gains so the possibility of fraud is not big." A dose of humility among free-market advocates could do wonders for the cause in Europe. That's important, because in the Old World, that cause is damaged, not lost.

By John Rossant

With David Fairlamb

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