Magazine article Newsweek International

Europe Is a House Divided; the European Union Has Become a Club of Slow-Growth Laggard Economies That Are Home to Dynamic Companies. Therein Lies the Seeds of a Growing Split between Political Leaders and the Business Elite, with Serious Implications for the Future Not Just of Europe, but of Globalization Itself

Magazine article Newsweek International

Europe Is a House Divided; the European Union Has Become a Club of Slow-Growth Laggard Economies That Are Home to Dynamic Companies. Therein Lies the Seeds of a Growing Split between Political Leaders and the Business Elite, with Serious Implications for the Future Not Just of Europe, but of Globalization Itself

Article excerpt

Byline: Rana Foroohar AND Stefan Theil (With Ginny Power in Paris)

A strange divide is growing in Europe. Political and business elites are increasingly at odds with each other. Corporate titans are celebrating the fruits of record profits, even as politicians angrily voice the growing fears of average workers. What is strange is that the joy and fear come from the same source: globalization. Europe has become a continent of competitive multinational corporations, and uncompetitive nations.

The signs are everywhere. In Europe, companies like BASF and Alcatel have ridden an export boom to higher sales and profits, and local stock markets have surged over the past year--Germany by 28 percent, France by 23 percent and the United Kingdom by 16 percent. Firms now boast record profits and stock prices (as measured against earnings) that are as high as those of their peers in the United States. Yet economists still figure that the Continent's fastest potential economic growth rate is a sluggish 2 percent--a full point slower than the United States'--due to Europe's clotted labor markets and obstructionist bureaucracy, and despite growing excitement about signs of revival in Germany. This growing split between fast corporations and stagnant economies explains the mixed signals coming out of Europe's powerhouses. Consider the contradictory stats from Germany last week--business confidence was way up, but so was the unemployment rate, and retail sales in the Christmas period were down. "There is definitely a big split in Europe at the moment," says Nouriel Roubini, an economics professor at NYU's Stern School of Business. "Europe is getting leaner and meaner, but that causes nervousness at the household level."

Increasingly the challenge of globalization--embodied by the rise of India and China--haunts political leaders, while the promise of these markets buoys the spirits of multinational CEOs. In Germany, where the current talk of a recovery means a rebound to just 1.4 percent growth, too little to make a serious dent in an unemployment rate that now tops 12 percent, Chancellor Angela Merkel recently called for new regulations on globalization to stave off the "grave" threat of social unrest. Contrast that to the mood at Siemens, where several years of painful restructuring are paying off in rising sales and orders. Its aggressive young cost-cutting CEO, Klaus Kleinfeld, has been cast in the press as a candidate to be "the next Jack Welch," legendary icon of American entrepreneurialism.

If Germany is the most prominent example of the split, the evidence is just as clear across the euro zone, where the average unemployment rate is 8.3 percent. In London, politicians are worrying over signs that the once vibrant domestic economy is slowing down to a more-German pace, while traders and investment bankers are recovering from parties celebrating record year-end bonuses, earned from the City's position as a center of international finance. In Paris, foreign takeovers of French companies are becoming a more and more sensitive topic. Last July, a furor was caused by a rumored PepsiCo takeover of Danone (the deal subsequently never materialized). Last week Prime Minister Dominique de Villepin made a television address supporting "economic patriotism," and reached across borders to weigh in on the bid by Mittal Steel of the Netherlands to buy Arcelor of Luxembourg, saying it was a "problem" because it includes "no industrial project."

This kind of political meddling appalls French business leaders, who are voicing increasingly urgent calls for free-market reform. Laurence Parisot, the new head of Medef, the major French employers' association, is pushing for new labor laws that would make hiring and firing easier, and a bonus system for unemployed people who manage to find new work. Last month Parisot pointedly criticized the "incomprehensible paradoxes" of President Jacques Chirac's tax proposals and the "Kafkaesque complications" in trying to create jobs in a nation with a strong tradition of state control. …

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