European Corporate Restructuring and Public Policy: Myths and Reality?

1. European Corporate Restructuring and Public Policy: Myths and Reality? Simon J. Evenett www.evenett.com HSG Alumni Konferenz St. Moritz, 8 September 2006

2. Contents of this talk • Drivers of corporate restructuring in Europe. • Myths? • Corporate perceptions of threats to the competitiveness of EU firms. • Policymakers analysis of EU competitiveness and the need for corporate restructuring. • Past and likely future policy initiatives. • Is European business being well served by current public policy on competitiveness?

3. European Corporate Restructuring: Myths and Reality

4. Gloom about European Corporate Performance • Pessimistic perceptions by policymakers and many commentators and foreign business people: • European business is slow growing, relatively unprofitable, and cannot meet existing competitive challenges. • European business will not restructure—or cannot do so because of employment law, corporate governance rules, competition law, etc. • European business is hampered by national welfare states, high taxes, etc.

5. Is the gloom warranted? Some contrary facts • The largest European firms now earn over half of their sales outside their home economy—up from 37% in 1997. • Extra-EU (15) exports of goods and services rose 9.2 percent per annum over 2000-4. (Comparable number for USA: 1.7%). • Evidence of greater flexibility of labour matters in German manufacturing.

6. Drivers of corporate restructuring in Europe • Traditional competitive dynamics—innovation, pricing strategies etc. • Liberalisation within Europe—principally sector specific. • Spread of “shareholder value” approaches—pressures from the market for corporate control. • Opportunities and threats created by the rise of the so-called BRICs (large emerging markets).

7. At home: Pricing/value propositions. Takeover. Creation of Chinese „national team.“ European backlash against delocalisation. Abroad: Access to foreign markets. IPR protection abroad. Regulatory discrimination. Specific emerging market threats to EU firms How many of these concerns have European policymakers addressed?

8. What policymakers are saying about European economic restructuring and reform

9. Policy discourse since 2000 • Focus here mainly on policy discource in EU, but with relevance to all European nations. • Disparate motivations. • Lisbon agenda. • Sapir Report. • National measures to protect large firms. • Forthcoming communications on competitiveness, trade policy, and internal reform.

10. Emphasis on reforms of labour markets and welfare states • The four “European models.” • Unemployment protection insurance and labour market flexibility—remember these policies are decided by national governments and not by the EU • Policy recommendation: Continental and Mediterranean nations should adopt the Nordic model (not the Anglo-Saxon model.) • Can the Nordic model be copied? • How would these reforms influence corporate performance?

11. The four European Social Models Efficiency Equity

12. At home: Pricing/value propositions. Takeover. European backlash against delocalisation. Policy response: Trade defense instruments. National governments at odds with European Commission here. Proposals for adjustment funds—not implemented. Policy responses to the emerging market threats identified by firms

13. Abroad: Access to foreign markets. IPR protection abroad. Regulatory discrimination. Policy response: New EU trade policy to focus more on commercial objectives. Take disputes to WTO and insist on new disciplines in trade agreements. New initiatives to mitigate this threat. Specific emerging market threats to EU firms

14. Concluding remarks • European corporate performance and restructuring is not as bad as many say. • Corporate perceptions of threats to competitiveness and impediments to restructuring are different from those that policymakers have focused on. • Brussels may soon take steps that will narrow the gap—but how much of this change is due to corporate pressure. • Cannot avoid the impression that policymakers and corporate leaders are operating in “parrallel universes.”