European Companies and the Great Recession: A View from the Trenches

The Great Recession and European debt crisis have had a profound impact on Europe’s macroeconomy and its public sector. Carnegie hosted Carlo De Benedetti, founder and former CEO and chairman of CIR, Paul A. Laudicina, managing officer and chairman of A.T. Kearney, and Gianni Riotta, editor-in-chief of Il Sole 24 Ore, to discuss how the financial crisis has affected European companies. Carnegie’s Moisés Naím moderated.

Varying Private-Sector Responses

Though companies now function within a highly globalized economy and share best practices across continents, the response of Europe’s private sector to the global crisis has differed from that of the United States. European companies have turned to exports as a source of growth, while U.S. companies have sought to improve productivity. However, substantial differences have emerged within the European business community as well.

• More Export-Driven: Laudicina and De Benedetti agreed that European companies tend to be more export-oriented than their U.S. counterparts. This widens their field of vision, leaving them better situated to exploit growing emerging markets. Riotta explained that this approach has already proven advantageous for some European companies that are succeeding by selling to global markets—particularly the BRICs—while those companies focused on domestic markets are suffering.
   
• Less Attention to Productivity: At the same time, Laudicina argued that European companies are generally less aggressive innovators, which holds down productivity. Furthermore, while explosions of productivity tend to follow disruptive episodes like the Great Recession, Europe has seen productivity fall by 0.4 percent, compared to growth of 3 percent in the United States.
   
• Slower and Less Aggressive: Throughout the crisis, European companies have not been as quick or decisive as U.S. companies when making adjustments, Laudicina contended. During the crisis, many CEOs froze, unable to strategize for the medium or long term amid disagreement about future conditions. De Benedetti also argued that Europe’s commitment to welfare has made it more difficult for companies to lay off workers. At the same time, some European countries have been able to aggressively cut costs: German companies and unions agreed to cut wages immediately after the crisis—lowering wages by 20 percent for Volkswagen, for instance. Labor policies and unions, however, make this impossible in other countries, such as Italy or France.
   
• Strength Outside the Euro Area: De Benedetti pointed out that the private sectors of those countries outside of the Euro area—including Poland, Switzerland, and the Scandinavian economies—generally outperformed those within it. However, companies within the Euro area face different challenges as well, De Beneditti acknowledged. For example, German companies face a slowdown in export growth, while companies in the periphery will be challenged by sharp cuts in government spending.

Looking Ahead

As companies adjust to the new global economic climate, the panelists suggested Europe’s private sector should capitalize on its current comparative advantage in quality-of-life sectors such as cars, food, and fashion.

• Cars, Food, and Fashion: As the global middle class grows, demand for high-end goods will rise. De Benedetti pointed to the strong growth in Germany’s automobile sector and in the food industries in France, Austria, and Switzerland as evidence that Europe is well positioned to benefit from the rise of major developing countries such as China. The fashion industry, of which Europe is a global leader, will likely also grow.
   
• Demographics: Although aging populations pose a challenge across industrialized countries, Laudicina explained that in France, the UK, and the Scandinavian countries, some signs of population growth are emerging. While these improvements may not last, Europe’s continued high share of wealth will keep domestic demand for goods robust.

Government Role

Riotta argued that the role of governments in the economies of both the United States and Europe has shifted as a result of the crisis—expanding in the former and decreasing in the latter.

• Austerity: Riotta noted that European leaders, and particularly those at the European Central Bank, are now committed to austerity. Though some experts have argued that this is poor policy, it is likely to separate the strong companies—which will likely survive—from the weak, whose prospects are less certain.
   
• Government Action: Panelists agreed that European governments now play a smaller role than they did previously because they no longer have the resources needed to remain active in the private sector. De Benedetti also said that European companies’ emphasis on exports deters them to push for substantial protectionist policies. Riotta predicted that the most likely government action is anti-immigration legislation, which will hurt companies that would benefit from skilled immigrant labor.
   
• Business-Government-Labor Pact: Laudicina argued that business, government, and labor must recognize that all three will lose if they get policy wrong—and, similarly, all will win if they get it right. Relationships between workers and employers, and between governments and businesses, must be repaired. The focus going forward must be less on wealth creation and more on value creation, he concluded.
   
• Differences Across Countries: While all governments should focus on innovation and adaptation, according to Laudicina, the best policy will vary by country. In the United States, for example, allowing workers to draw down on IRA benefits for retraining and job adjustment could be beneficial. Though Riotta noted that the European welfare system is no longer sustainable, European expectations about state welfare will prevent this sort of reform in Europe. 
   
• A Currency War?: De Benedetti argued that Europe will be a marginal player in the recent flare-up over the value of global currencies, in part because Europeans disagree on what the value of the euro should be. Ultimately, the dispute will have to be settled by the United States and China, the two largest players in the disagreement. However, no significant action is expected until the November G20 meeting in Seoul.