Does The EU Really Care About Its Entrepreneurs?

The Internet economy holds great promise for revitalizing European competitiveness, but the Eurozone's technology pioneers are often daunted by the struggle with red tape and more seriously-a cultural aversion to failure.

For the first time in three years, the world's top business leaders--who assemble annually at the World Economic Forum's week-long meeting in Davos, Switzerland--had reason to feel optimistic.

Prior meetings had to deal with the specter of the currency crisis in Asia two years ago and the economic sluggishness among EU members last year. With recovery underway in Asia and growth picking up steam in Europe, the annual gab-festival of 1,300 leading figures in business, politics, and academe could devote itself, guilt-free to the meeting's theme of "new beginnings, making a difference."

Or nearly without guilt, that is. After last year's debacle in Seattle over the World Trade Organization's meeting, there was hope that Davos devotees would re-affirm their faith in the benefits of free trade. Given the opportunity to do just that, President Clinton nonetheless equivocated his support in a 90 minute speech that left most business leaders puzzled as to why he took the trouble to attend.

It fell to Mexican President Ernesto Zedillo to give the most spirited defense of trade liberalization by censuring "this peculiar alliance...who give their reasons behind globalphobia a certain altruistic air." Zedillo referred to the historical evidence that demonstrates that developing nations raise their standard of living "by participating in globalization."

The inevitability of globalization was evident even to the demonstrators who scuffled with armed Swiss national police units in seeking to disrupt the proceedings. (Waiting patiently for CNN cameras to position themselves, protest leaders knew where their priorities lay.) With ASEAN in Asia, Mercosur in Latin America, and NAFTA in North America, the EU finds itself at a critical juncture, mindful that, in its 50-year march, it has provided a successful framework for the continent's prosperity--not just free trade in Europe but a single marker leading to a single economy.

A year after the creation of the Euro, the EU is on the threshold of reuniting the continent, in peace, democracy, and prosperity. It is the hope of EU membership that drives political and economic reform from Latvia to Croatia. And amid the idyllic, chocolate box-like scenes of Swiss mountain tranquility, debate in Davos over far-reaching reforms had a certain tone of urgency. The heavy-hand of regulation and inflexibility, referred to by British Prime Minister Tony Blair, and French Finance Minister Christian Sauter, could yet blow it. Globalization and Internet technology are forcing the pace of reform. Germany has announced plans to reduce its punitive 50 percent capital gains tax, opening the way for a restructuring of its industry. Italy is attempting to reform its labor markets. In France, 40 percent of the equity market is now in the hands of shareholders who aren't French. The Netherlands, Belgium, and Sweden are experimenting with welfare reform.

UK mobile phone giant Vodafone's hostile bid for Germany's Mannesmann became a test case as to whether the EU is serious about moving to a transparent market for corporate control. When Vodafone launched its bid, German politicians and labor leaders mounted a furious and, at times, acrimonious counteroffensive. Britain's euroskeptic press countered by accusing Brussels of running a rigged game. Why is it alright for BMW to take over Rover and French firms such as Vivendi and Lyonnaise des Eaux to roll up the British utility sector, but an open tender for a single German firm precipitates a Stalingrad-like struggle? After German authorities clarified the rules of engagement--and several German industrialists urged CEO Klaus Esser to accept the inevitable--Mannesmann finally dropped its defenses and agreed to a $180 billion takeover, the biggest in history.

But not everyone is delighted. There are rumblings among Europe's next generation of business leaders that such reforms are merely the response of technocrat deers caught in the headlights of the oncoming globalization juggernaut. Since 1997, the WEF has given voice to a special task force of "global leaders for tomorrow." Its 25 members, managers, and entrepreneurs in their 30s and 40s have been led by Havas Interactive CEO Hubert Joly and Fields Wicker-Miurin, partner in global financial markets for A.T. Kearney, U.K. Speaking on behalf of these insurgent GLTs, Joly and Wicker-Miurin argue that there are cracks in the cathedral of the "new" Europe.

Last year, they asked what they thought were benign questions at a plenary of EU's leaders: "How do you define success for the future?" "What kind of society are you attempting to build?" The queries generated lively debate in the hallways and hotel rooms of Davos. "It's not just about economics," says Wicker-Miurin, who although U.S. born is married to an Italian diplomat living in London and considers herself European. "Yes, we want prosperity," she argues, "but we look around us and see many aspects of European society that are unsustainable: a bankrupt welfare state, high youth unemployment and a sclerotic financial system that is starving our entrepreneurs of capital."

Convinced that Europe's old guard are out of touch with what truly matters, the task force developed--in collaboration with Yohan Stern, CEO of France's Wizzclub.com--a readiness index measuring what they regard are the things that ought to be important.

The index attempts to measure how well EU member countries perform in four areas: Sustainability--a look at how wealth creation impacts environment and quality of life; Fairness and individual freedom--examining measures of success or lack of such as youth unemployment; Harmony--benchmarking civil liberties, social cohesiveness, or the lack of it; and Readiness for the future--which attempts to capture member preparedness to deal with technology, competition, and workforce changes.

Joly and Wicker-Miurin readily admit their index is a work in progress. (The release 2.0 version nearby is an "upgrade" from the group's initial 1.0 version in 1999.) It's an imposing document showing each EU member countries status in 17 areas. Neither tax policy nor government's claim on national resources was considered worthy of inclusion, although the bite can be surprisingly big, as the Misery Index, created by Ernst & Young senior tax partner Jack Anderson for Forbes International, makes clear. (See chart).

The Forum's GLTs conceived their index as a way to call attention to the fact that Europe needs political leaders with a different vision than those who crafted the Maastricht and Amsterdam treaties. That vision, however necessary at the time, does not go far enough, they say, in building a successful society. Given the corruption scandals involving the grand old men of Europe--former chancellor Kohl and French President Mitterrand, not to mention former EU President Jacques Santer--the gang of 25 have written off the old guard.

To many even the new guard doesn't inspire. During the course of the annual meeting, French Finance Minister Sauter said cryptically, "we embrace the market economy but we reject the market society." Tony Blair believes Wicker-Miurin comes close to expressing their ideal, but with Britain outside the euro currency zone its influence is marginal. "Besides," she adds, "with Blair, much of it is rhetoric; I don't think he feels it profoundly."

The problem may be much deeper than the gang of 25 realizes. With e-commerce as the competitive battleground of the future, the cultural differences between the U.S. and EU are striking. The American attitude that business failure is therapeutic contrasts with European reluctance to risk it all. In addition, the U.S. government rakes a hands-off approach to the Internet, whereas the EU's first instinct is to regulate.

This is particularly true of data protection rules. The European Commission intends to drive through no fewer than seven e-commerce directives by the end of this year concerning copyright, e-money, and contractual dispute resolution. EU regulators criticize their U.S. counterparts for doing very little in these areas. The question is, in its zeal to control all the variables, will EU governments--not to mention the Brussels' superstructure--strangle Europe's fledgling companies?

Johan Stael von Holstein, founder and CEO of Icon Medialab, a Stockholm-based internet portal, clearly thinks so. "I will never in my life start another business in Sweden," blasted the 38-year-old entrepreneur, who has three internet start-ups under his belt. "The rules and restrictions are so punitive that it's clear the authorities really don't want you to succeed."

In addition to Sweden's tax system, von Holstein points to his native country's restrictions on giving stock options to employees. Young euro entrepreneurs, such as himself, have what it takes "to kick American butt," he says, but an immature venture capital market in Europe and red tape are not helping matters.

Ron J.M. Tetteroo, 37, founder and CEO of InfoRay, a B-to-B info-structure provider, launched in the Netherlands in 1994, agrees that euro entrepreneurs have a heavier burden than their U.S. counterparts. After graduating from Erasmus University near his native Rotterdam, Tetteroo worked in IT for Royal Dutch Shell. He says he was inspired by Michael Dell "to just go for it," not realizing how daunting the tax and regulatory system would be. He maintains that because young euro entrepreneurs are not necessarily in it to get super rich super fast, Europe's high tax rates are not as much of a problem for them as they would be for Americans.

Nonetheless, Tetteroo raised eyebrows in Dutch government circles when he switched the company's headquarters to Cambridge, MA, to get out from under euro-red tape. Tetteroo, who had a modest hit with an earlier start-up called 4C, found Dutch investors restrictive and unduly rigid in their thinking. Bankruptcy in the Netherlands, as elsewhere on the continent, is considered shameful. Roel Piepers, a former leading executive with Philips and Compaq, who joined InfoRay's board, agreed with the company's new backers, Mayfield Partners, in convincing the former rock band leader to re-incorporate InfoRay as a Delaware holding company, moving its sales and marketing to the U.S.

Initially, the Dutch government was not amused. But after he was invited by no less than Queen Beatrix to tell his story to a council of leading Dutch business figures, they came around to understand that they had to change the system if they hoped to hold onto other homegrown entrepreneurs. Startups in Europe remind Tetteroo of the Sinatra line: "if you can make it there you can make it anywhere."

Von Holstein and Tetteroo attended the annual meeting as part of a Deloitte Touche Tohmatsu program of having 50 "technology pioneers" share ideas about the role technology plays in shaping the new economy. Many contend that Europe is not that far behind the U.S. in terms of IT expenditure as a share of GDP. Given that wireless application protocol (WAP) is moving the Internet from the PC to wireless telephony, an area where Europe leads the U.S., EU companies may actually have an edge in the next cycle.

This assumes EU-based companies have the will, speed, and flexibility to seize the high ground, which is something Philips, for example, was unable to do 30 years ago despite its invention of the audio cassette and its early lead in developing the home VCR. There is also the matter of the EU's capital leakage, to which the creation of the euro draws fresh attention now that there's a European Central Bank to combine the totals for the 11 currency members.

According to Barclays Capital, foreign investors bought [epsilon] 72 billion in assets in the first 10 months of 1999. Over the same period, EUl1 investors disinvested a total of [epsilon]222 billion. The direct investment picture is similar: foreign investors put [epsilon]53 billion in; EUl1 investors pulled [epsilon] 51 billion out. The drain is not likely to change in a hurry. The EU's rigid labor laws and tax structures would appear to aggravate the problem. Progress has been made in tax reform and deregulation, but most eurozone countries take a huge bite of the nation's resources. "The EU might become a net negative to entrepreneurs," says Guy Hands, managing director of London-based Nomura International. "In some respects it's going the wrong way in moving toward centralized control."

To reap the benefits of the new economy, young business leaders at Davos agreed that the EU will have to shake off the clubby industrial model for a more open, dynamic system; certainly a more failure-tolerant culture is needed. But this requires courageous leaders to challenge the old order. Sensing the dilemma, Kurt Beidenkopf, president of Germany's free state of Saxony observed that "half of Germany's GDP is allocated by the government. What will this do to us when knowledge replaces capital as the most scarce resource?"