EU Businesses Still Plagued by Red Tape, Companies Say
European Union leaders pledged in Lisbon four years ago to turn the trade bloc into the world’s most competitive economy by 2010. But executives at AstraZeneca, BASF, SAP and Total say bureaucracy and high taxes still hold back economic growth and stifle entrepreneurs.
“We are paying a heavy price,” said Tom McKillop, the chief executive of London-based AstraZeneca, the EU’s second-largest drug maker.
Europe’s $11-trillion economy has lagged behind that of the U.S. for 10 of the last 11 years, and the EU predicts it will do so for the next two. Taxes average 43% of wage income, compared with 30% in the U.S.
Spending on research and development is about two-thirds that of the U.S. and Japan. About 1 in 20 Europeans sets up a business compared with 1 in 10 Americans. In setting up shop, it takes a European entrepreneur 45 days to collect all bureaucratic permits. Their U.S. counterparts need only four.
Deregulation such as looser labor rules and less red tape would help the EU catch up by boosting annual growth by 0.5 percentage point to 0.75 percentage point over the next decade, the European Commission predicted in a report in January. Yet as things now stand, the U.S. will outgrow Europe 3.8% to 2% in 2004 and 3.3% to 2.4% in 2005.
“We would love to have similar rules as in the U.S.,” said SAP chief Henning Kagermann, referring to European patent law, which allows countries to still grant their own patents. Walldorf, Germany-based SAP is the world’s largest maker of business-management software.
Just this month, European industry ministers missed a deadline to adopt an EU-wide patent. With the cost of a patent covering eight nations for eight years at $37,000, twice as much as a U.S. continentwide patent, EU policymakers are putting companies at a disadvantage, said Francois Cornelis, head of Total’s chemical business Atofina.
‘Disappointed’
“We are disappointed at the present moment by the lack of a cheap European patent, by the enormous administrative burden on our enterprises and by the new regulations that are growing exponentially,” Cornelis said.
European leaders meeting on Friday plan to say they are making “considerable progress” toward the competitiveness goal set in Lisbon during the height of the technology boom, according to a draft communique published by Irish Prime Minister Bertie Ahern, who will chair the meeting. The statement repeats promises of “structural reforms” and “better regulation.”
The European Central Bank says borrowing costs are low enough to spur the economy. The bank’s main interest rate, at 2%, is the lowest since World War II in the 12 euro countries.
Germany last enjoyed lower short-term borrowing costs in 1876 when Otto von Bismarck was chancellor. That hasn’t prevented Germany from trailing average European growth every year since 1992 and piling up budget deficits in excess of the EU’s limit of 3% of gross domestic product since 2002.
What Europe needs is “more entrepreneurship, less regulation,” said Juergen Strube, supervisory board chairman of Germany’s BASF, the world’s biggest chemical company. “Europe has to be very innovative in order to gain a competitive edge because the cost level in Europe is generally a little higher than the cost level in the U.S. or in other parts of the world,” Strube said.
A series of legislative setbacks and half-measures has followed EU leaders’ commitment to a “radical transformation” in Lisbon in March 2000. Decision-making will become more complicated when 10 mostly Eastern European countries, including Poland, the biggest, take their seats at the EU’s decision-making table May 1.
The EU took 15 years to agree on a law governing mergers and acquisitions that turned into a voluntary takeover code after Germany, fearful of cross-border raids on companies such as Volkswagen, engineered the defeat of a compulsory code that would have outlawed “poison pill” takeover defenses in 2001.
As the mergers and acquisitions business revives from a slowdown after the deflation of the Internet bubble and the Sept. 11, 2001, terrorist attacks, the M&A; gap between Europe and the U.S. is as wide as ever. Bids on 2,000 European companies worth $180 billion have been announced in the last six months, lagging behind the U.S. figure of 3,350 deals valued at $250 billion, according to data compiled by Bloomberg.
European politicians have abandoned their plans from 2000 to remodel their economies along U.S. lines on several fronts.
Unemployment Up
Accounting scandals at U.S. companies such as WorldCom Inc. and Enron Corp. have helped kill EU plans for U.S.-style quarterly financial reporting. The slowdown from 3.6% growth in 2000, the fastest in a decade, has driven European unemployment up to 8% (8.8% in the euro countries) and made jobs, not risk-taking, the priority, according to economists.
“You could achieve something like the Lisbon agenda if you had a fundamental aggressive reform like those we saw in the U.S. and the U.K. in the 1980s,” said Elga Bartsch, an economist at Morgan Stanley in London. “We don’t have the same willingness to embrace such bold reforms” in the rest of Europe.
French President Jacques Chirac is considering new loans to Alstom, the engineering company with 110,000 employees that the government saved from bankruptcy last year. France is also fighting a European Commission order to collect on a $553-million government loan to Bulla, a struggling computer maker with 8,000 jobs at stake.
In Lisbon the EU declared war on subsidies, vowing to “reduce the general level of state aids.” Now the talk is of “investment,” especially in “infrastructure.” Plans for government-backed loans for projects such as the $3.9-billion Galileo satellite-navigation system are being pursued.
Attempts by the commission, the EU’s Brussels-based regulatory arm, to crack down on state support for businesses must “reflect the current state of international competition and Europe’s industrial imperatives,” says Chirac’s pre-summit strategy paper.
The French paper adds that “better regulation doesn’t necessarily mean less regulation.”
The need to compromise among 15 countries prompts legislation to be watered down. The European Parliament passed a copyright-enforcement law stripped of the criminal penalties used in the U.S. European courts won’t be required to throw intellectual-property thieves into jail, under a law passed by the European Parliament on March 9.
The competitive balance is unlikely to shift soon, judging by the wrangling over the EU-wide patent that was supposed to be available by the end of 2001. It took until March 2003 for governments to strike a tentative agreement on the patent law, and now that is coming undone.
“It’s a mystery to me,” EU Single Market Commissioner Frits Bolkestein said, how EU leaders “can keep a straight face.” The leaders’ response Friday to the patent deadlock will be, according to Ireland’s draft statement, to set a new deadline.
