A Little Americanization Can Fix Europe’s Economic Misery

In the good old days of the Napoleonic Wars, the battle for Europe conjured up romantic images of brilliantly dressed armies trundling across the Continent, the cavalry to the front, the artillery being dragged through the snow behind them.

Today a new battle for Europe is underway. This time the forces trundling across the Continent are far less colorful: investment bankers, pension funds, software entrepreneurs, opportunistic politicians, even, as we shall see, the odd swarm of locusts.

The war has to do with capitalism -- and it could have an enormous effect on the world’s economy. On one side, broadly speaking, stand those who want to Americanize Europe -- upping the competitive ante, making labor rules flexible, emphasizing shareholder return. These include investors, entrepreneurs, British Prime Minister Tony Blair and much of New Europe. On the other side are Europe’s labor organizations, its pensioners, French President Jacques Chirac and German Chancellor Gerhard Schroeder. Stuck in the middle are Europe’s big companies, which like U.S. labor rules and U.S. executive salaries but not U.S. takeovers.

In the last couple of weeks, the battle has unfolded rapidly. The first shot: Franz Muntefering, the boss of Schroder’s Social Democratic Party, compared investors to “swarms of locusts that fall on companies stripping them bare and moving on.” The next shot: a list of (inevitably) American locusts was leaked, notably investment firm Kohlberg Kravis Roberts (of “Barbarians at the Gate” fame). The capitalists struck back: Two hedge funds forced the resignation of the boss of Germany’s stock exchange. Then a European Parliament blast: It voted to end Britain’s opt-out from a directive restricting the average working week to 48 hours.

As the cannons fire and the cavalry charges, what’s really happening? Several things stand out. The first is that Europe is in a funk. It has lagged behind the U.S. since 1995. Unemployment in the euro area is twice that in America. Productivity growth is dismal.

Secondly, though the general picture is miserable, there are New Europe rays of light. Britain, Finland, Ireland and Sweden all, on some measures, have outperformed America. Europe has left America in the dust when it comes to the adoption of wireless technology. Germany is the world’s biggest exporter.

The most important ray of light is that Europe’s weaknesses have little to do with the macro-economy. The euro enjoys as much confidence as the almighty dollar (a miracle!). And the European welfare state can work. Some of the countries with the biggest welfare systems -- notably in Scandinavia -- have actually done best.

So what is the Continent’s problem? Too many labor regulations and moribund capital markets. France and Germany have high minimum wages and rigid rules governing who you can hire and fire. (Blair was right to call the working-time directive “a hammer blow” to Britain’s economy.) And the Continent’s capital markets are sluggish, restricted by a “stakeholder” corporate culture -- executives wedded to the status quo and not to competition. Germany had only three IPOs last year.

In a sense, the Continent is a quarter-century behind the U.S. In the mid-1970s, behemoths such as GM, GE and IBM created elaborate hierarchies of “company men” who spent their lives scheming to get bigger offices and accumulating growing commitments to their employees, in the form of pension and healthcare rights.

Two things changed this: The arrival of the Japanese, who woke up most of American manufacturing, and a new approach to using capital markets. Barbarian takeover artists such as Henry Kravis broke up giants that included RJR Nabisco. This created carnage but it also sponsored a surge in competitiveness. Smaller entrepreneurial firms were unleashed, and the big companies that survived -- such as Jack Welch’s General Electric -- did so only by turning themselves into much more inventive organizations.

So Herr Muntefering is half-right. The “locusts” are indeed a threat to Europe’s status quo. But far from threatening to strip its companies bare, they are the best chance of restoring its competitiveness.