Access to Global Capital Fuels Changes in Europe

Huge demonstrations by workers protesting cuts in welfare programs all but shut down France’s economy last week.

But the demonstrations didn’t slow the pace of changes occurring in Europe. Leaders of the 10 member countries of the European Union still plan to meet in Madrid at the end of this week to discuss the final stages of economic and monetary union, including creation of a single currency for the old continent of marks and francs, lire and pounds.

Europe is unquestionably at a turning point.

Yet most Americans, when they take notice at all, react to Europe’s changes skeptically and a little anxiously. “Those old countries will never really unite,” Americans say--and then ask: “But what if they do?”

Such inattention is curious because Europe is a major partner of the United States in trade and investment. European companies have more than $250 billion invested in U.S. businesses that employ at least 3 million people. The United States has a comparable stake in Europe.

And Americans should recognize that what Europe is really attempting these days is to reduce government budget deficits that, proportionately, are two to three times the U.S. deficit.

Europe’s purpose in battling budgets, like America’s, is to free up capital for investment in industries of the future--and for emerging markets such as Eastern Europe.

But to succeed, European societies must change from ones that employ some people at high wages and benefits but tax them heavily--46% average income tax plus 20% value added taxes in Germany--to support those who do not have employment.

Unemployment rates are astronomical: France at 12%, Germany at 9.6%, and that’s the official rate. “But . . . [Germany’s] would be 13% if statistics were kept comparably to the U.S.,” says economist Stephan-Gotz Richter, head of Transatlantic Futures in Washington, an arm of Deutsche Bank Research.

Such deficit-spending and unemployment have persisted for years. Yet change is coming now. Why? Significantly, it’s not really politicians or ambitions to unite Europe that are bringing about change but global capital markets and American-style shareholder demands.

“Capital markets are integrating globally even faster than those for trade,” says Klaus Diederichs, managing director for mergers and acquisitions at J.P. Morgan & Co. in London. In recent years, he explains, “German, French and Italian companies have been getting international shareholders,” meaning U.S. and British pension and mutual funds.

“These are demanding shareholders who want returns, not speeches,” Diederichs says.

And that has been reforming European industry. A milestone event occurred in 1993 when Daimler-Benz, the maker of Mercedes Benz cars, listed its stock on the New York Stock Exchange. To do so, Stuttgart-based Daimler had to open its accounts to investors and security analysts and ultimately to restructure its company--dropping money-losing operations and reorganizing Deutsche Aerospace.

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Another milestone passed last summer when Sandoz, the Swiss chemical and pharmaceutical company that last year bought Gerber baby foods, spun off its chemical company to shareholders.

The company’s purpose was to increase shareholder value by making Sandoz a growth stock in pharmaceuticals and nutrition while letting shareholders also have a cyclical chemical stock--in a separate company named Clarion.

The idea of such maneuvering is to free up capital within the company and to attract it from outside investors. The same idea propels all the privatizations of state telephone companies, from Ireland’s Telecom Eireann to Turkey’s Telekom Turkey.

Telecommunications is booming in Europe as old-line companies refocus their capital--steelmaker Mannesmann has become a cellular phone leader in Germany--and all phone companies try to avoid losing business to more efficient U.S. and British companies, including AT&T;, MCI in joint venture British Telecom, and others.

Everywhere Europe’s companies are on the move, merging across borders and putting production in lower-cost Eastern Europe or the United States or Southeast Asia--as Porsche is about to do after three years of losses.

The message to governments is that companies won’t continue working under high-cost, high-tax conditions. So reform had to come.

The connection of a single currency is that it’s an excuse: In making economic reforms to prepare for a single currency, politicians can say: “It’s not me cutting your entitlements, but European unification.” The balanced-budget amendment provides similar cover for U.S. reforms.

But in another sense, the single European currency may well come about by 1999 as planned because Germany wants it. Why? Because German industry is a very high-cost producer, yet the country runs a trade surplus by exporting to its European neighbors. If they devalued their currencies in the future, as EU rules now prohibit them from doing, it would cause Germany competitive problems.

So Germany wants to link its customers in a tighter union and preserve its markets. The single currency is protectionist, concludes economist Avinash Persaud of J.P. Morgan.

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What does all this portend? That European companies will become more attractive investments but not yet totally exposed to world competition. So there will be opportunities for efficient U.S. and Asian companies.

And that more European workers will be displaced by economic modernization, but the freeing up of capital should engender more jobs in Europe.

The next step is to spur the growth of venture capital and entrepreneurial companies on the old continent, which incredibly doesn’t have them yet. “Bill Gates couldn’t have done here what he did in the U.S.,” said a European banker with resignation. “He wouldn’t have had the access to capital.”

Access to global capital markets will do more than demonstrations to change Europe. Indeed, it was doing so even as Paris closed down last week.