TCS Daily

Bridging Two Cultures

By Jeremy Slater - May 5, 2003 12:00 AM

The divisions in Europe so obvious in the run-up to the Iraqi war may be starting to close, if the more placatory mood at the EU summit in Athens recently was any indication. But when it comes to deciding how European financial markets could better act as one the differences are still very wide, indeed.

The arguments are largely a result of the different cultures of business in Europe. The UK, which is home to Europe's biggest financial market, opts for an Anglo-Saxon model, while the French and Germans prefer a more managerial and consensus-led approach. The rest of Europe falls into a north-south divide, with Northern Europe largely supporting more Anglo-Saxon methods and Southern Europe backing the consensual approach.

This means that - despite the best intentions of the European Commission to find a balance between these approaches - important proposals can end up in tatters if a major European country and one or two other smaller states decide it is not in their best interests. Take, for example, the way Germany worked against and finally destroyed the proposed Takeover Directive. In 2001, with the proposal about to be accepted by the Council of Ministers after years of careful negotiation, Berlin decided to oppose the directive, which would have made mergers easier. But Germany balked following heavy lobbying from two major German companies, BASF and Volkswagen, which feared foreign predators. Volkswagen is partly owned by the German state of Lower Saxony.

There then followed an intense period of negotiation to find a workable compromise between the Commission, European Parliament and Council. Despite these efforts the directive was voted down after a second reading by MEPs in July.

Other badly needed reforms, such as pensions, could come under similar pressure from countries that believe the state should have more control than the markets. Here also there is a strong North-South divide in the EU, with Northern Europe believing the markets should have a greater role and the less market-savvy Mediterranean states opposing this sort of move.

The Commission could therefore have a wish-list for more open markets, with greater ability to buy and sell shares across borders, more harmonised company accounting systems and other legislation that will allow businesses to list on several different European markets, but it needs to balance these cultural and business differences to succeed. This is the big challenge.

If there is one thing the UK, France and Germany can agree on it is that their markets all reacted positively to the coalition forces' success in Iraq. Since 9 April (perhaps not coincidentally the day Saddam Hussein's statue was toppled in downtown Baghdad) these indices have all swung upwards and recovered earlier war-related losses.

The question is now how long can this last? There are signs that things may be starting to improve for some of Europe's major listed companies after three years of profit warnings and scaled-down expectations.

For instance, Finnish telecoms manufacturer Nokia reported (on 17 April) that although its profits fell in the first quarter of 2003 it expects sales of its handsets to increase by up to 13% in the second quarter. Reports that this talismanic company for the telecoms, media and technology (TMT) sector could see a better future bought some much needed good will back to European markets.

The only problem is that economic forecasts are not so rosy. Eurozone expansion is still being held back by poor growth in Germany and even though Chancellor Gerhard Schröder has recently outlined proposals for liberalizing the German labor market many observers think he doesn't have the political will to see these changes through.

Meanwhile in Paris the nearly one-year-old French government is having just as hard a time selling its economic reforms.

Growth in the UK is better than in either Germany or France, but is predicted to be sluggish this year at under 2 percent. A stronger pick up is expected next year, but that could be a long time for British companies to wait.

In the meantime, the Commission and EU leaders need to find a way to push certain member states to get over their pro-growth and employment policy phobias.

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