Europe's TURN.

While radical transformation has the Euro-Zone leaping ahead after years of stagnation, bureaucratic red tape still impedes emerging enterprises. Can Europe cut through the maze left in Socialism's wake?

"Europe is back," French finance minister Laurent Fabius intoned triumphantly during the World Economic Forum. Many at the gala gabfest seemed to agree. Former treasury chief Larry Summers stated that 2001 "ought to be a terrific year in Europe" and promised 3 percent growth. German finance minister Hans Eichel seconded that motion, concurring that 3 percent growth for the 12-nation euro-zone was possible. Joschka Fischer, Germany's foreign minister, was slightly more circumspect, predicting slightly more modest growth of about 2.5 percent--depending upon monetary policy and tax cuts.

The prospect of European Union enlargement and the historic introduction of Euro banknotes and coins in general circulation bouyed confidence in the region's prospects. (Ireland, the "Celtic tiger," may grow 6 percent this year.) And a dip in the U.S. economy--coupled with recurring jokes about blackouts in California--only added to the sense that this year might signal a decade where Europe would take center stage.

One of the few voices of dissent came from Harvard Business School's Michael Porter. In a session about European restructuring, Porter was asked why Europe's performance lagged significantly behind that of the U.S. Furrowing his professorial brow, Porter offered a detailed critique of the region's strengths and weaknesses. Pros included strong educational systems, a large pool of technologically skilled labor, highly efficient uses of energy, and leadership in many key fields such as mobile telephony. Offsetting these, he says, are excessive government intrusion in the economy, poor compensation incentives for managers and employees, and a reluctance to accept higher levels of immigration given Europe's slow demographic pace.

"Europeans are still ambivalent about the capitalist sys tem," he asserted. "They believe that a competitive economy is not compatible with social harmony." Scandinavian economies, he noted, were once similarly encumbered with a fear of what French intellectuals call "red-in-tooth-and claw" capitalism. But attitudes in the Nordic countries, he added, have shifted. "It's now okay to be rich."

While admitting to some of Porter's criticisms, many European business leaders took exception to his thesis. "Tax harmonization is a precondition for Europe's long-term competitive ness," countered Volkswagen chairman Ferdinand Piech.

Deutsche Telekom chairman Rom Sommer argued that EU firms are now ahead of the U.S. in telcommunications and media. "There are many efficient models of capitalism other than the American model," huffed Societe Generale CEO Daniel Bouton, who nonetheless allowed that the EU should change the decision-making process to allow harmonized product standards and regulations. ("Start with France," a Dutch businessman shouted from the back of the room.)

Clearly, European business is in the midst of a radical transformation that would have been unthinkable a decade ago. The stakeholder model is gradually giving way to the shareholder model as capital markets and global governance expand. Years ago a typical European corporation would produce its products at home and export them. To day companies such as Vivendi Universal, Aventis, and Daimler-Chrysler are creations of cross-border mergers where products and services are generated close to the markets served.

Although the French and, to a lesser degree, the Germans remain somewhat paranoid about turning to out side financial markets, it's clear that the corporatist model in which banks serve as both lender and shareholder is in retreat. U.S. investment banks--Goldman Sachs and Morgan Stanley top the list of completed M&A managed underwriting in Europe last year--are pushing the cultural shift. What's more, European public share ownership, although neglible by U.S. standards, is growing. The flotation of Deutsche Telekom boosted the number of shareholders in Germany to a record 8 million.

VW's Piech hit a nerve at Davos when he said, "We need more young people to become entrepreneurs. An American entrepreneur is allowed to fail; in Europe, no one would lend to someone who went bankrupt."

Porter countered that over-regulation is the hurdle. "It takes three months to start a business in France com pared to one week in the U.S.," he said. "The EU stacks the deck against entrepreneurs."

Young entrepreneurs attending the WEF seemed to agree. Andre Lussi, a former UBS managing director who leads international clearing and settlement firm Clearstream International, said it's largely a question of culture. In his native Switzerland, liabilities live with a person for 20 years. In Scandinavia it's 10 years. He says tiny Luxembourg, where his company is based, affords some relief from punishing taxes, but suggests the EU has too many regulations for emerging businesses.

Christine Karman, founder and president of Tryllian, an Amsterdam-based software development company specializing in mobile agent technology, reports that if she had to launch her company all over again, she wouldn't base it in The Netherlands. "In America, if you've started something and failed, people think you may have learned something," says the Dutch astrophysicist, who started her 80-employee firm in 1997. "Europe isn't as accepting."

Nonetheless, persistence can pay off for a Euro entrepreneur. "In the States, a Sand Hill Road firm might read 10 business plans out of every 100 they get, whereas in The Netherlands a VC might look into 10 out a total of 20 plans they would see altogether."

By contrast, Michael Lynch, CEO and managing director of Autonomy Corp., a Cambridge, UK-based internet software firm, sees the climate improving. The former Cambridge University teacher and founder of Neurodynamics, a company specializing in fingerprint matching, says his continuing challenge is motivating talent. Europeans don't respond to at-risk compensation schemes as Americans do. Kurt Kammerer left Siemens with little money and no VC support to found Living Systems in 1997, a software firm specializing in integrated supply chain agent technology. The Karlsruhe University graduate says that Germany may have a punishing nominal tax structure, but there are ways entrepreneurs can navigate around it. Some German entrepreneurs, he feels, want "everything for free." He, on the other hand, is happy if government continues with its reforms and stays out of his way.

"Ten years ago being an entrepreneur was rather awkward," he says. "My in-laws were highly skeptical." Today he reports that local government is very supportive, having helped him find comfortable headquarters in Donaueschingen, a small town in Baden-Wurtemberg in the Black Forrest.

"It's still a question of culture, not to mention risk taking, taxation, and overcoming rules about labor force mobility," says Esther Dyson, chairman of Edventure Holdings. Dyson relates an anecdote about a would-be entrepreneur who told her he was thinking of starting a company, but was waiting for a certain piece of "enabling legislation."

"Can you imagine an American waiting for any kind of legislation before starting an enterprise?" she asked. Even the U.K., which comes closest to offering an ideal climate for new capitalists, has its issues.

"The U.K. probably has the best capital market for young companies and the most sophisticated VCs in Europe," says Simon Best, who had worked with ICI agro chemicals and Zeneca Plant Sciences (now a unit of AstraZeneca) before starting Ardana Bioscience in Edinburgh, Scotland. "But there's a fundamental problem in the region--making a lot of money is not completely respectable. It's a legacy of socialism." His two-year-old biotech company makes contraceptives and novel treatments for menstrual disorders such as menorrhagia. Best, whose entrepreneurial roots began with a career in the music business launching pop bands, believes removing obstacles in employment law is the greatest contribution the bureaucrats in Brussels could make.

If there's a single issue that unites EU business leaders, it's cutting through the maze of red tape that threatens to engulf them. Enterprise commissioner Erkki Likkanen has called for reducing the regulatory measures or requiring competitive impact assessments, but little so far has been accomplished. The structure of the EU and its relation to the national governments is such that change does not come easily. Each measure--social, labor, or environmental--can be justified at least on one or more levels. It's an issue that goes right to the heart of the real question facing the EU. Is it to be a "United States of Europe" or a "United Europe of States?" Such was the title of one discussion led by Dominique Moisi, deputy director of the Institut Francais de Relations Internationales. There was no clear consensus, whereupon Moisi warned, "You exit ambiguity at your own risk."