New world order

Risk & Insurance, May, 2003 by Graham Buck

U.S. companies seeking to do business on the continent will find that the old business climate issues of culture, regulation and labor may become even more pronounced once the current political difficulties fade. That may make Europe an increasingly riskier marketplace.

Tempest in a teacup, or more permanent bad blood?

It's unclear whether the political rift between the United States and Donald Rumsfeld's "old Europe" no less than repercussions from the Iraqi war, will cause long-term fissures in the world business community. What is clear is that the fissures that have emerged are not only transatlantic, but also more than just about war.

A chilling in relations between neighbors France and the United Kingdom over issues like immigration has turned distinctly frostier since their widely divergent stances on Iraq. The split over Iraq looks likely to be the issue that rules out British membership of the single European currency for the foreseeable future, for example.

Perhaps more significantly, the process of enlarging the European Union to add nations in the east to its 15 member states may also have hit a roadblock. French President Jacques Chirac's lofty rebuke to countries such as Bulgaria and Romania, which supported American action, is symptomatic of the prevailing ungenerous spirit.

The resulting impact on business could endure longer than American consumer boycotts of French wines and cheeses, which is more likely to prove a short-term phenomenon.

"Business tends to overcome minor political rifts, but this one has caused more harm than anything I can remember over the past 20 to 30 years," says Ipe Jacob, head of the financial markets group at Grant Thornton, Frankfurt.

"Deep divisions have been caused, with strong feelings on both sides. The business of forgive and forget--and getting on with the more basic task of making money, is likely to take longer than usual."

Some European business leaders, alarmed by recent developments, were engaged in bridge building before the military campaign got under way. Ernest-Antoine Seilliere, president of the French employers association Medef warned of the risks of "breaking the historic links between France and the United States and compromising the chances of European unity." Sir Richard Evans, chairman of defense contractor British Aerospace, acknowledged the interdependency as the rift widened.

"There's no getting away from the fact that, with few exceptions, the United States looms large in most defence companies' business strategies," he said.

"European companies--Rolls Royce, GKN, Thales, BAE Systems, MBDA to name but some of them--have all reshaped their strategies to a greater or lesser extent to capitalize on this where they can.

"And, we should not forget that the traffic is not all one way. We have also seen the major U.S. companies looking for business in Europe, establishing a presence directly and through partnerships to gain market share in the world's second largest defense market."

The Regulatory Burden

Jacob suggests that with a population of 300 million, the European Union is the only trading bloc with the capacity to compete with North America. "But the United States operates in a bloc rather more efficiently and is likely to continue doing so for decades to come," he adds.

American companies with major exposures in Europe have learned to live with what most regard as a significantly less business-friendly environment.

A major handicap is that all EU member states face a significantly higher regulatory burden, imposed by the Brussels-based European Commission, says Graeme Leach, chief economist for the London-based Institute of Directors.

They include restrictions on companies' ability to hire and fire, which Leach says serve to delay any shakeout, although the bottom line demands that it will still happen.

"European companies will have to respond--one doesn't want to downsize the workforce, but if demand just isn't there and the company is contracting, it's inevitable that labor will be lost.

"The high levels of unemployment in Europe show the effects of regulation, which makes firms more reluctant to take on staff," he adds.

Leach stresses that different environments on either side of the Atlantic tend to overshadow major divisions within Europe itself. They include a clear north-south divide, differing attitudes toward the role of the corporation and varying levels in the corporate tax burden from country-to-country.

The situation is also changing--no more so than in the continent's largest economy, Germany, where the business sector is lobbying to ease the heavy burden of the welfare state. "There's a gulf between what the corporate sector wants and what the electorate wants, which means little political momentum for change--witness Chancellor Gerhard Schroder, who is heading in the other direction," says Leach.

While American risk and insurance managers, long-established in Europe, are accustomed to its very different business environment, the labor laws often come as a surprise to those newly arrived. They can even prove alien to British companies. Low-cost airline Easy Jet has rapidly developed from modest beginnings to become one of the U.K.'s major carriers. A year ago it acquired the option of buying British Airways' German operation. only to find it was unable to get the workforce to accede to its requirements such as flexible working hours. It finally opted to walk away from any deal.