Beyond the Euro: Rethinking Competitiveness.

It's overcome the single currency hurdle, but Europe has plenty more to tackle. CEOs and U.S. and European dignities gathered in Brussels to debate issues ranging from a dearth of tech workers to barriers to entrepreneurialism.

AT A TIME WHEN THE EU IS EMBARKING ON significant expansion and internal reform, CE, in partnership with Deloitte Touche Tohmatsu, gathered CEOs from across Europe and North America to meet with European and U.S. officials and explore the prospects for further market liberalization and economic growth. Participants discussed the policy implications for initiatives on e-commerce, taxation, and equity markets. Held at U.S. Ambassador to Belgium Paul Cejas' residence in Brussels, the roundtable discussion focused on the choices facing both Europe and the CEOs of enterprises operating within the single market. A year after the introduction of the euro, business and political leaders alike agreed that the EU is undergoing a much wider and deeper transformation than the launch of a currency union. An explosion of international capital and a revolution in technology are pushing events faster than politicians, and even businesses, can respond.

For the most part, business leaders felt encouraged that the politicians both within the EU apparatus and in most home governments are beginning to recognize the futility of trying to micromanage the complex forces of global competition. Businesses created by the Internet are undermining the control of traditional business-government oligarchies. Germany's Neuer Markt for young venture capital will see 150 IPOs launched this year.

Even left of center governments, which now dominate Europe's capitals, are boasting low inflation, stable currencies, and fiscal policies that would have been denounced a mere 15 years ago as "right-wing." Deliberate acts of Friedmanite capitalism are being committed by the most unlikely figures. Chancellor Gerhard Schroeder in Germany proposed across-the-board corporate income tax reductions, including the repeal of a 50 percent tax on capital gains. Schroeder's Social Democratic parry could see the writing on the wall after suffering losses in local elections last year. It also faced discontent among German firms threatening to locate new facilities--and new jobs--outside of Germany. Vodafone's victorious battle for Mannesmann, along with Olivetti's hostile takeover of Telecom Italia signaled the beginning of the end for Europe's clubby capitalism of cross shareholdings and sweetheart arrangements.

Every government in the EU has to respond if Europe is to compete on equal terms with a dynamic U.S. But can the EU legislate new technology entrepreneurs? Participants in the discussion understand that e-businesses are not like traditional businesses in that they operate as intellectual and knowledge-based hothouses that can pick up and relocate anywhere they are best treated. Europeans who feel that the best policy is for their politicians to get out of the way also admit that it's not always so simple.

Social costs outside the U.K. and Ireland can cripple fledgling firms. Youth unemployment is still in double digits in France, Belgium, and Italy. The Belgian government of Guy Verhofsradt is attempting to strengthen the social model by modernizing with new incentives for work instead of a mere safety net. Welfare state reform has a long way to go. Europe desperately needs a higher degree of labor mobility and decentralized wage bargaining, neither of which is on the horizon. The EU also faces an IT skills shortage and an immigration tsunami from the East of low-skilled economic refugees.

The great fear is a two-tiered Europe, consisting of a prosperous technocratic elite and a semi-skilled or unskilled class unable to bridge into the new economy. This is partly why Europe's citizens are increasingly disenchanted and anxious. In a speech to the European Parliament last month, EU president Romano Prodi said people are losing patience with their institutions' slow rate of progress. Public opinion fears the social instability they say EU enlargement will bring.

Post-Euro Productivity

James Copeland (Deloitte Touche Tohmatsu: Will the EU ultimately accelerate or retard European competitiveness? Will the convoy move at the speed of the slowest boat? Those questions must be answered. And that's the challenge for the EU. Will the environment change fast enough to allow global competitiveness in an electronic economic environment? U.S. productivity gains in recent years are real. That's not a fluke, and we are just at the beginning of that productivity-increase curve. The increase in the U.S. in the last quarter was something approaching 7 percent--absolutely unbelievable.

Could Michael Dell and people of his ilk happen in Europe? Probably so, but it's more difficult for such entrepreneurial heroes to emerge in Europe. You also have the difficulties of multiple cultures and languages. Those of you who moved from places like Atlanta, GA, to New York would understand that cultural difficulties also exist in the U.S., but they're more profound in Europe.

Geographical organization is diminishing. In my firm, our practices in New York have less in common with our practices in Miami than they do with our practices in London, Paris, Munich, and Tokyo. Also, a partner who works in international transfer pricing as a specialization and happens to work in Phoenix, AZ, has far more in common with his colleagues who work in the same area around the world than he does with the audit partner who sirs right next to him. These are changes that we don't know how to manage yet; and governments have nor begun to deal with the long-term implications.

Going forward, all governments are likely to have to deal with a common set of problems and issues. For example, genetically modified food is likely to become a problem everywhere around the world rather than just in Europe. And issues that become issues in the U.S. for a certain community of interests are likely to become an issue for governments all around the world who have within their constituencies that same community of interest.

J.P. Donlon (CE): The World Forum in Davos, Switzerland, included a group of some 50 "technology pioneers," who had all started Internet-type businesses. One told me that he will never start another firm in Stockholm, because the cultural and legal authorities were such that if you fail, it's okay, but if you succeed, they tax everything away. He said, "I couldn't offer stock options to my employees, and I wasn't a super millionaire on the order of Michael Dell and Bill Gates. But we made some money. And they just thought this was the worst thing I could do." There was a cultural bias against success if it was perceived to be too excessive.

Claus J. Raidi (Bobler-Uddeholm): In Austria and in other countries in Europe, being profitable was indecent, immoral. A Time magazine story two years ago said Germany has a very high rate of unemployment, but you still can't get milk on Saturday. This shows how inflexible European politicians are with labor regulations and remuneration. Wages are not flexible. We give five weeks of vacation, compared to three weeks in the States.

Is the Internet really the big thing? The Internet is, according to what we learned in macroeconomics, the ideal marketplace. You have complete information, ideal reaction time, and homogeneous groups. My son buys his books on amazon.com and the right book comes on time at the right price. So the inflexibility of our institutions in Europe and the possibilities of the Internet create a big, big problem for politicians.

Copeland: The enormous changes being driven by the Internet may in fact wash right through inflexible government regulations, laws, and organizations that don't find a way to channel what's happening rather than to block it.

Charles Morgan (Acxiom): The Internet and some of the technologies allow you to choose where you want to live and work. While in Mexico, I was able to download some of our new products from the Internet. I needed help with the installation and I found out that an expert working for Acxiom who lives in California provides services globally. People can also have choices about where they buy things. The Internet allows people to buy things from amazon.com wherever they live. In the end, people will gravitate to where they want to live and make economic decisions that will force political change.

Copeland: The dot-coins in the U.S. are now offering stock options as a major inducement to talent, which presents a real problem for our firm because we're a private company. It also presents similar problems for European companies that tax stock options at the point of issuance. In that case, perhaps they don't decide to live where they would like to, but rather where they can pay a lower tax. That brain drain from high- to low-tax environments will ultimately cause governments to react in some kind of tax equalization or closer to tax equalization than we see today.

Ed Kopko (Butler International): Another equalizer may be the capital markets. We're starring to see venture capitalists step away from Silicon Valley because it's so expensive. Some are calculating how much their burn rare will be if they set up in another state or another country, based on the wage rates, taxations, and everything else. So if the environment in this country is not competitive, you will lose the capital draw for new business formations.

Terry Lay (VF Corp.): As a multinational employing people who had lived and worked here all their lives, as we began moving people around we found that we had to begin concentrating on net income as opposed to gross income because the costs of living and the taxation rules were quite different country by country. Stock is a major form of incentive for us, and in Belgium, for example, it's taxed at the point of issue. So we have people rejecting one of the best incentives we could give them. But ultimately we pass on all of these costs so that the employee loses two ways. One, the tax structure from gross to net, and, two, buying goods and services with that net income. When the consumer has true access to a more global marketplace through the Net, they will rush to it from Europe. I'm sure that many people politically are concerned about how to control that. Ultimately you can't.

Fon Koemans (Nederlandse Waterschapsbank): The Internet itself is the marketplace that cannot be denied, and we have to play on it as far as is possible. But nor all goods and services are fir for trading through the Internet. We are working in the wholesale financial world, whereas the Internet is more retail oriented.

Patrick Vittet-Philippe (EU Commission): We should avoid this kind of brainwashing. We all have to go into the Internet, even if we sell stuff that is not saleable over the Internet. Some types of business will profit from going on the Internet, others not.

In the new digital economy, if you want things to work you have to have the consumer on board. Consumers will go to companies where they feel most secure. We have had some tough discussion on consumer protection in Europe, which is the challenge. It is a true three-way dialogue between government, consumers, and industry.

Europe lags behind the U.S. in key areas such as PC penetration and Internet penetration. In Europe, the user level is about 15 percent, while the U.S. is probably at 35 or 40 percent. Some European countries are farther ahead, such as Finland, Sweden, The Netherlands, while others--usually, unfortunately, the big member states--are actually quite down the line. Interestingly, Finland in Europe and Alaska in the U.S. actually have the highest Internet penetration in terms of users per 100 inhabitants. But Europe is leading in mobile communications, so when the Internet goes mobile, Europe has a chance to make a quantum leap forward.

H. Onno Ruding (Citibank, NA): U.S. firms benefit from a better environment than European companies. First, higher mobility. Second, social security and the enormous costs that go with it for both the workers and the companies, and, third, the high tax burden. But most of these disadvantages relating to Europe apply less to the U.K. I see many shortcomings in that country, but overall the taxation and social security costs are lower and labor mobility is better.

The creation of the euro is providing an enormous improvement in performance and productivity for Euroland. The dismal exchange rate is less vital than the fact that you now see one financial market, which is beneficial. Even in the slowest-moving countries you see change. Options, for example, are becoming more popular, despite the enormous handicaps. There's more understanding of success although it's still dismal in some corners. It's still bad, but it's less bad.

We in the private sector must all try to convey the message to the regulators, legislators, authorities, and diplomats that both sides try to adopt legislative and regulatory measures that are not inward-looking. The Americans have a long tradition of a rather inward-looking mentality that what is good for America is good for the rest of the world. And that is not acceptable to Europeans on taxation matters. Europeans also have a kind of bad habit of sometimes coming up with a regulation that doesn't fit with the American side, which creates irritation. So I hope on Internet matters like regulation, taxation, etc., the two will coordinate.

Finally, on the matter of regulation, I'm the first to criticize the bureaucracy in many European countries, but many Americans are mistaken in criticizing the EU. They think that all bad things come from Brussels, but that is not true, because in many cases the EU opens up markets; they deregulate. There are issues coming from both sides, and we both should try to create improvement.

Arnie Pollard (CE): Actually, France, Italy, and the rest of the continent seem to be going through pretty good times right now. With that long laundry list of disadvantages, why does the economy seem okay around here?

Raidl: We are not doing so well. All of the European countries have more or less huge budget deficits, so we live from the future, so to speak. Also, Europe as a whole has a huge input ratio because the Internet-related software and hardware is not created in Europe.

The Europeans realize now that all our systems--pension, social security, and health care--cannot be financed anymore. We have to put more emphasis on self-reliance. We have trade balance deficits and budget deficits, and huge input ratios of the future technologies. I don't think that we are doing so well.

Donlon: Have we seen the end of the European welfare state, then?

Raidl: Yes, finally.

Livio Marchesini (Fincantieri): The Europeans have made adjustments, but its going slowly because Germans and French don't want to give up their systems. A lot of things have become much mote flexible, even the shopping hours, but the business is still very difficult.

Pat Kelly (PSS/World Medical): Doesn't Europe have twice the unemployment of America?

Raidl: Germany does. They always said, "These are the people who pack groceries in the superstores in the States." But mote than half of the new jobs in the States fall higher than the median income.

Donlon: If Europe doesn't address this social cost issue, won't it hit a wall, because the demographics are such that in the year 2035 there will be a huge economic crisis? Italy, for example, has a birth rate well under replacement levels.

Marchesini: That's an issue for most countries in Europe.

Copeland: Lest we get suicidal here, there are a lot of advantages Europe does have. The last wave of U.S. technology enhancement--SAP, enterprise-wide systems--came from Germany. And wireless technology, which is the next real wave, largely comes from Europe. The fact that you have underinvested in technology relative to the U.S. over the last five to 10 years may even prove an advantage because, if the technology is shifting from enterprise-wide systems like SA--which you sold us, thank you--and moving to Internet-based technologies where investments will have to be made, you can leapfrog right into making investments in the next wave of technology.

Jean Pierre Lehman (Institute Management Development): I've been a harsh critic of Europe and of my own country, France. But I'm amazed by the degree of change that has occurred. Renault announced that English would become the corporate language, which is like saying that the next Pope will be a woman. [Laughter] France has a socialist government and yet it's a socialist government that has gone more into privatization than any previous government. That's the good news. The bad news is that this government is in the process of imposing the 35-hour work week. It's a Jekyll and Hyde situation.

Most people have been talking about the external barriers. There are also internal barriers to competitiveness within firms. I worry European firms are insufficiently global. Since the East Asian crisis, there have been fantastic opportunities to make acquisitions of firms there and develop activities, and the Europeans are a bit conspicuous by their absence. There are exceptions, but this is generally lacking.

The other element is the service revolution. We, particularly maybe the Germans, are still too engineer oriented, too manufacturing oriented. Where you will make money in the future is not through the product you make, but everything that surrounds it--the design, the concept, the service, the financing, and that sort of thing. This has been the strength of a variety of different companies in the U.S.

Morgan: What's beyond service is actually using IT to create experiences for people in the process of buying--creating a whole integrated experience that is tailored for you, JP, or for me, Charles. And you can't do that without information. But we've put barriers in the place of collecting and managing information. I believe we need some pre-emptive legislation in the U.S. because we have a lot of people in the states trying to write legislation. Effective self-regulation is really beginning to take effect, but we do have abuses and issues to address. But that legislation should define an environment where the consumer has a choice.

I want to be able to say, "I don't want you ever to call me. As a matter of fact, I don't want my data in your computer." But for a company that I like and trust, I want them to collect all the information they can to create a beautiful experience for me. So we are really looking at some models today of business that are beyond our traditional ways of thinking about doing business.

Vittet-Philippe: The data protection directive is actually an internal market directive that was taken not to add layers of regulation, but to reconcile vastly different systems in Europe. We were hyper-protective in Germany and France and had no protection at all in Greece. It created a level playing field where there is security and people know what foot they have to dance on. Self-regulation is an important part of that directive. So it's wrong to say Europeans are too strict, and the U.S. are all liberal. Ultimately, there should be a balance. What we don't want is people not being told what data is collected.

Dot-Com Envy

Lehman: If one rakes a cross section of those European views, there is a combination of admiration and--no doubt about it whatsoever--sort of envy looking at these extraordinary developments that have taken place in the NYSE. But there's also an element of anxiety, a sense of, is the new economy real?

The Internet is an agent of revolution. If you're a 53-year-old manager and you're not part of that, then you want to resist it and say, "Well, it's going to take time." Certainly Europe doesn't have the flourishing entrepreneurial talent that we see in the U.S. and in India. There are exceptions. Ireland, for example, has been quite successful in attracting people. But overall the European environment has been rather disappointing from that viewpoint. So while the changes over the course of the last three or four years have been quite extraordinary, is it enough? No. The business world is a bit like the world of nations with the possibilities of colonial development toward the late 19th century--capturing new markets, new industry, new technologies.

A lot of traditional values in Europe's social environment are breaking down. Corporate loyalty is disappearing. Money is obviously a part of it, but it's also the adventure. To me it's like discovering Africa 100 years ago. You're talking about going up to the source of the Nile. You'll always find the person who's happy to be deputy deputy deputy accounts general manager or whatever. But these are not the quality people we're looking for. This brain drain threat of people going off to the U.S. is one of the biggest faced by Europe. Fortunately for the U.S., intellectual capital is coming mainly from outside. I think the Americans would have great difficulty generating it themselves.

Vittet-Philippe: One of the reasons Silicon Valley has been so successful is the importation of workers. One-third of the work force is from South Asia. The German government is thinking of having the same system, special visas, for people from Bulgaria or Bangladesh. There is a strong mathematics culture whose help we perhaps need in Europe.

Copeland: A year or so ago there were predictions of doom and gloom about all the intellectual capital being pulled our of Canada to the U.S. It hasn't happened because people who live in Canada like Canada, they want to live there. But there has been a certain level of discontent created by the economic differences between Canada and the U.S. that put pressure on the law makers and the government system of Canada, and now you see the two government systems coming closer and closer together in terms of the tax structures and other differences. That's a more likely consequence than wholesale movement from The Netherlands to Silicon Valley.

Kelly: The Internet does not limit a company from holding on to its brain trust. About a year ago one of our key programmers--he and his wife are from Fiji, which is 12 hours off from Jacksonville--had to go back for family reasons. Today, he's still an employee of our company. He literally dials into our company on the Internet. At the same time that we're shutting down, he's dialing in to find our what he has to program for the next day. So no matter where your talent is, you can hold on to it.

Copeland: There's no regulatory body in the world today that's keeping up with the pace of economic change, and that's the problem for all of us. I've heard people say today that not all businesses need to be working through the Internet. If you are in business today and you have concluded that there's only one way to conduct that business, somewhere there's a 23-year-old who doesn't know that. And they are trying to figure out how to eat your business alive using the Internet. I cannot tell you how rapidly that is converting American business.

Charles Schwab today has a higher market capitalization than Merrill Lynch and Morgan Stanley, Dean Witter combined. I don't know how many of you had heard of Charles Schwab five years ago, but they did it simply by deciding that a strong embedded broker network was, in fact, a disadvantage, not an advantage. I can't think of a single business that can't be improved through some use of the Internet, including our own.

Lay: Whether we're discussing the Internet or all these many other opportunities and issues, at the heart is whether or not we are market-based in our thinking. Ultimately, the euro was a great breakthrough of countries and legislation coming together to find a common vehicle to move the European economy forward. That thinking was very market-driven, and we need more of it. My company often asks me what will be the rate of change in Europe related to, say, the euro, or whatever it might be. I see it changing slower than it should, or than we would expect--Europe's economy is not as purely market-driven. There is more thinking about barriers and about what I'll call a social mentality.

People work hard in Europe, but unfortunately they don't work as often. They have an attitude about balancing their life. And that's not all bad. I've learned what bank holidays are, and when I'm here I enjoy them. Redefining our business in Europe because we couldn't sustain a manufacturing base was an interesting experience. Working with unions and the local legislature where an American mentality would be, "We're in business for profit," I ran into a mentality that was, "No, you make profit to employ people." To me the whole issue of a market-driven economy and whether it's embraced, and whether there is a common perception of what that is, whether we're on the business side or whether we're on the legislation side is going to go a long way towards demonstrating how quickly we move forward together.

A Who's Who Of Roundtable Participants

Paul L. Cejas is the U.S. Ambassador to Belgium.

Martin L. Cheshes is the Deputy Chief of Mission, U.S. Embassy to Belgium.

James E. Copeland, Jr. is chief executive of New York-based. Deloitte Touche Tohmatsu a $10.6 billion global professional services firm.

Charles Ford is the Minister Counselor for Commercial Affairs.

Wolfgang Grewe is Deloitte Touche Tohmatsu's managing partner for Europe. He is located in Germany.

Mark Grobmyer is chairman of Little Rock AR-based ICS, an inter-national development firm.

Patrick C. Kelly is chairman and chief executive of Jacksonville, FL-based PSS/World Medical, a $1.5 billion medical supplier.

Fon Koemans is chairman of the managing board of Hague based Nederlandse Waterschapsbank, a $15 billion asset managed financial services company

Edward M. Kopko is chairman, president, and chief executive of Montvale, NJ- based Butler International, a $444 million strategic outsourcing services company.

John D. Largent is partner of Brussels-based H. Neumann, a management consulting firm specializing in executive searches.

Terry L. Lay is president, European and Asian Operations of the Brussels-based unit of VF Corporation, a $5 billion apparel firm.

Jean Pierre Lehman is professor of International political economy at the Lausanne-based Institute Management Development.

Janez Lotric is management board chairman of Liubijana, Slovenia-based Petrol, a $577 million oil company.

Andrei Nikolaevich Likhatchev is director general of St. Petersburg Russia-based Lenenergo, a $500 million utility provider.

Livio Marchesini is director general of Trieste. Italy-based Fincantieri S.p.A., a $2 billion ship building company.

Charles Morgan is chief executive of Little Rock, AR-based Acxiom Corporation, a $730, million market and business research company.

David O'Sullivan is Chief of Cabinet to the EU Commission President

Claude Pourbaix is chairman of Deloitte Touche Tohmatsu Belgium.

Suzanne Radell Sene is the Commercial Attache for the U.S. Mission to the EU.

Claus Raidl is chief executive of Vienna-based Bohler-Uddeholm, a $1.5 billion steel production company.

Olli Rehn is Chief of Cabinet to the EU Commission on Enterprise and Information

H. Onno Ruding is vice chairman of New York based Citibank, a $500 billion asset managed financial services company.

Rainer Schon is general manager/head interational division and financial institutions of Dusseldorf-based WGZ Bank, a financial services company with $42 billion in assets managed.

Alan Spitzer is chairman and chief executive of Ohio-based Spitzer Management, a $850 million automobile and real estate franchiser.

David Smith is president/Europe of the Brussels unit of Jacksonville, FL-based PSS/World Medical, a $1.5 billion medical supplier.

Marcel van Velthoven is general manager northern Europe of Nieuwegeivi, Netherlands-based PSDI, a $250 million computer software and services provider.

Richard Vissers is president and chief executive of Orlando, FL-based CTS, a $650 million bulk fare travel company.

Patrick Vittet-Philippe is the expert adviser to the EU Commission

A Brave New E-World

Patrick Vittet-Philippe, expert adviser to the European Commission and DG Enterprise, advocates internal market initiatives to create a "critical mass" for e-commerce and entrepreneurship in Europe.

"It is clear that governments should not substitute themselves to private enterprise. Industry should lead. In the new economy, more than ever. But there still is a role for government--particularly at the European level. With that in mind, a number of key directives have been adopted or will be adopted soon.

In the area of electronic signatures, a flexible, technology-neutral European network is now in place that ensures mutual recognition and free circulation, as well as legal recognition of electronic signatures. Another directive, also well advanced, is the E-commerce Directive, which is based on principles of mutual recognition and free circulation. It is broad, yet minimalist. Broad because it covers all present and future 'Information Society Services,' such as electronic, at a distance, and upon individual request. Minimalist because it targets key obstacles to e-commerce, such as establishment, e-contracts, and liability of operators Adoption is expected by summer.

Work is proceeding on the revision of the Copyright Directive. The Commission is determined to implement a balanced solution that protects the interests of both rights-holders and network operators.

Of course, many loose ends, some substantial, remain. However, companies cannot wait for an academically perfect global framework. They have to do business. This is why the Commission is now concentrating on issues of competitiveness and entrepreneurship.

To meet new competitive challenges, Europe needs to forge innovative partnerships-between governments, between industry and governments, and between industry players. Bureaucracy, complexity, and market regulations are the enemy of the entrepreneur. The simplification of the business environment is an urgent priority. An example is the penalizing bankruptcy laws. In the U.S., you are allowed to fail and restart. In Europe, failure remains a stigma, often for decades. The Commission will use every means at its disposal to convince member states to bring improvements.

The Commission has consistently backed self-regulation as a flexible, efficient, cost-effective alternative to regulation in many areas Self-regulation is a useful 'economy of legislation'--achieving the same results without cumbersome lawmaking. Still, it must be in conformity with, and backed by law. It must be enforceable, verifiable, auditable, and effective--with clear recourses, particularly across borders.

This is why I welcome the idea of cooperative approach to governance, or co-regulation, put forward by the UNICE. Rather than mere coexistence of regulation and co-regulation, this implies sharing of responsibilities through negotiated agreements between public and private partners. Companies also need to compete and to cooperate at the same time. Such co-opetition is also at the heart of standardization activities.

All these initiatives have one thing in common. They aim at creating a 'critical mass for e-commerce in Europe. Ultimately, e-commerce is a test-ground for the wider issue of enterprise policy and the diagnosis is clear. Despite recent progress in the e-commerce is a test-ground for the wider issue of enterprise policy and the diagnosis is clear. Despite recent progress in the e-commerce area, the EU is losing to the U.S. because of lack of entrepreneurship. In short, we need fundamental changes in legislation the administrative environment, and the business culture if we want to have a chance to preserve the European model in the face of global competition."

Growing Club Euro

Nancy Kontou, member of the Cabinet Commissioner for Enlargement, and Ed Kronenburg, deputy special coordinator for the office of the Stability Pact of SE Europe, brief symposium attendees on plan to bring new member states into the EU.

"There are 13 countries currently up for accession to the EU. Hungary, Slovenia, Poland, Estonia, Cyprus and Czech Republic, Slovak, Latvia and Lithuania, Romania, Bulgaria, Malta, and Turkey. At some point in the future, all these countries will be part of the Union and we will have 28 or even more countries in the European single market where goods, people, and capital will circulate freely and competitive rules will apply across the board.

But before we are in a position to take on new members we must make sure that we reform ourselves so that the Union will not collapse from an institutional point of view. The community institutions were originally conceived for six member states, and it's already a bit difficult to manage 15. It will be impossible to manage 28 or more effectively. We have a commitment form the member states to try to decide on the institutional reforms by the end of this year and--because they have to be ratified by the national parliament and the member states--to have them in place by the end of 2002. So, as of the end of 2002, we should be ready to welcome new members to the EC. When will the candidate countries be ready? Some of them say 2003; others say 2006 or 2007. What do the Commission and the member states say? Nothing. We cannot tell, and we don't want to create any wrong assumptions.

We want enlargement to take place, very soon, but we also want to get it right. However, given the different degrees of preparedness of the countries involved in the current negotiations, enlargement will take place in successive wages." -- Nancy Kontou

"The difficult thin in all of this is how you manage these aspirations. How do you create policy that on the hand makes it realistic, and on the other, prepares these countries for accession to the EU?

The Stability Pact, which came about during the Kosovo conflict, is a joint exercise from the U.S. and the EU in conflict prevention. The international community has been muddling through such conflicts since before '91, when the conflict really started in the Balkans. And we've paid a high price in terms of human suffering, numbers of casualties, and enormous numbers of refugees and displaced persons--and now the cost of reconstruction in Bosnia-Herzegovina. Germany at one point had more than 350,000 refugees from Bosnia at a cost of DM5 million a year. So, obviously, there's a big interest in trying to prevent this from happening again.

Beyond being an exercise in conflict prevention, the Stability Pact is also a joint effort in which countries from the region, as well as countries from the EU and the U.S., and other parts of the world can bring their expertise and know-how to improve the situation. In trade issues, for example, right now it's a huge patch-work of different rules customs, regulations, and taxes. So one purpose of our work is to improve trade relations both between the countries themselves and between these countries and the EU and the US and others. All of these countries were also in need of huge infrastructure changes and improved private sector development.

We set up a Business Advisory Council of CEOs of major companies, who talk to one another about the impediments to investment and trade in the region. We established country-specific road maps of what's necessary to improve the situation of each individual country. So the deal is, 'Yes, we will try to help you. We will fund your project proposals, with the only condition being that you are willing to take the necessary measures to make it work.'" -- Ed Kronenberg

Financial Fallout

Herve Carre, Director for Directorate Economy of the Euro Zone and the Union, reports on the euro's effect on EU competitiveness.

"The introduction of the euro has come at a time of dramatic changes in the financial field as a result of globalization, deregulation, and technological progress. The euro has created an increasingly competitive environment for the EU banks. It has eliminated the competitive advantage for domestic players associated with the existence of national currencies, and fostered the development of much broader and liquid security markets.

One of the most visible responses to such pressures is the recent acceleration of consolidation in the European banking sector and the involvement of increasingly large national players. While consolidation remains largely a national phenomenon, the general view is that cross-border consolidation will accelerate. The Commission has stressed that the truly efficient, well-integrated, cross-border market will greatly boost the prospects for growth and development across the EU.

Some beneficial effects are already visible. National financial markets are forced to become more efficient. New business opportunities are appearing for the financial services industry. A broader range of innovative and competitive financial products and services is being offered to consumers. Over time, access to capital should become easier, and the cost of capital lower, particularly for small- and medium-size enterprises.

The competition among financial intermediaries is certainly significant in promoting the integration and efficiency of our capital market. That's not enough. There are many areas where a single currency needs to be supplemented by further action, including ensuring full application of rules of competition. The Commission has clearly shown that it will not tolerate discriminatory measures against foreign investors and that it intends to ensure that national interest is not an obstacle to creating a level playing field.

The action plan for implementing the framework for financial markets launched May 1999 sets up priorities and proposes a timetable for legislative and other measures to tackle three strategic objectives. First, the completion of the single market for wholesale financial services and the removal of remaining barriers to raising capital on an EU-wide basis. Second, creating open and secure retail markets to promote and enhance transformation, information, transparency, and security for cross-border collision of retail financial services. And third, ensuring fully adequate rules and supervision for integrated financial markets.

Finally, creating an appropriate framework for financial stability must be priority. The emergence of deeper and more liquid securities markets should lead to falling market and liquid risks. This, coupled with the improved efficiency of the financial markets and financial institutions, should, in general, be beneficial for financial stability."

Europhoria is Back

Richard Morningstar, U.S. Ambasador to the EU, and David O'Sullivan, chief of cabinet to the EU Commission, were among the diplomats and government representative weighing in on the economic and social issues facing Europe.

"We have to manage the disputes we have in a constructive way. And we have several. We're close to an agreement on privacy, and we've made progress on biotechnology. But we still have issues and there are lessons to be taken.

For example, both sides must be careful how they use the World Trade Organization as a dispute settlement mechanism. We don't think enough about what happens if we win. We can't have the WTO come to decisions that put the other side in an impossible political situation, because all that will do is wreck the WTO and have an adverse effect on the relationship.

Then, some say the euro's failed because it's so weak, but in the short and medium-term a weak euro actually strengthens our exports. Back in my business days when the dollar was so strong in the '80s, I testified before Congress saying, 'We can't compete.' I would suggest that some European businesspeople are very happy with the situation right now.

Finally, it terms of e-commerce taxation is going to be a big issue. How do you tax transactions? It's almost impossible. We're working on both sides of the ocean on this. Data privacy is another. How do you enforce that? We need some king of alternative dispute resolution where both parties can file a few pieces of paper and someone gives them an opinion.

As the EU becomes more transparent and open, European firms will also have to look differently at and examine how they deal with EU institutions. In the U.S. we have the opposite problem with our lobbying system and the campaign reform issue, but it's a little too much the other way in Europe I think business has to look at how it can be more effective in at least getting its views across so that they're adequately considered." -- Richard Morningstar

"We probably have the most favorable macroeconomic outlook for a generation. Even the most pessimistic forecasters have predicted that Europe is now poised for a period of higher growth and job creation than we've seen for the last 10 or 15 years.

We're determined to use this favorable macroeconomic situation to make the structural transformations in the European economy that wee have been identifying a necessary in the last five years--particularly those flowing out of the debate about employment--and to make those transformation now in the good years. To make the transition t the knowledge economy, put into place the regulatory framework to make that succeed, and complete the single market in areas like financial services, energy or aviation where we still have a way to go. And since we have an issue of public acceptance, to emphasize the need to recast our welfare systems, education and training systems, education and training systems, and pension systems to fit with the new economy.

We now face a period, hopefully, of increasing growth and diminishing unemployment, and it is the time to gain public acceptance to make those final structural changes." -- David O'Sullivan