Jul 18, 2011

Doing Business in Europe in the Year 2020!


I have been working with my team at school for the last couple of weeks on a reflection piece on the future of doing business in Europe.  I wanted to share with you some of the thoughts we have come up with. I would love to hear from you, whether you are European or not, your thoughts on this. 
European countries are very complex and old societies; they have gone through many iterations of development that have shaped them into what they are today. On the other hand, the European Union (EU) is much like a confused teenager that is slowly forgetting about its ideals and dreams.  
Sixty-three years after the European Economic Council (EEC) was founded, the story has changed. The EEC grew to become the EU, and now includes twenty-seven member countries instead of six.  The EU has started to deliver on its ideal promise: the promise of transforming a continent with a violent history to one full of peace and prosperity. Today, we reflect on the options and challenges that Europe faces, and how these factors will impact how business is done in Europe ten years down the road.  
The European Commission has stated its vision for the year 2020, as one that allows the EU to, “to become a smart, sustainable, and inclusive economy” (Europa.eu, 2011). In the end, these three reinforcing priorities should lead to high employment, productivity, and cohesion in EU and all member states. Are these realistic objectives? Does Europe have what it takes to tackle the structural social and economic barriers it is facing? Will the generation that wasn’t alive through WWII be able to secure and ensure the survival of the original European dream of prosperity? 
Throughout this paper we will discuss the challenges that Europe faces both internally and externally, and then analyze some of the tensions that require balancing in Europe. Finally, we will discuss some of the scenarios the old continent will be facing and the actions required by the European leaders to reach the most desirable outcome.
The challenges can be divided into both internal and external ones. The ones we will focus on are migration and immigration, political structures and directions, and the recent economic structures.  
The Guardian reports that, “The EU's population now stands at 495 million and is projected to rise to more than 520 million by 2035, before falling to 505 million by 2060.” (The Guardian, 2008) Yet, with these demographic challenges both migration and immigration have continued to put significant strains on the EU progress. Internal migration from new member states to founding and economically sound states have caused increased social strain. Additionally, legal and illegal immigration from outside the EU has increased these social strains. The increase in this migration has resulted in the developed countries having more strains on their social safety nets, citizens having more competition for jobs and housing. This has overall raised perceived cost of living without any positive changes in the quality of life. The response by citizens on this matter has caused a rise in right wing anti-migrant politicians in most EU founding states. 
To ensure future growth, Europe will need to address migration and immigration challenges. There is a need for coordinated policy to deal with these challenges. This takes us to the second challenge, many new member states of the EU have traditionally old infrastructure from their communist times. This old and fragile infrastructure is not able to meet the demands of a 21st century economy. One of the challenges facing the EU is to ensure an infrastructure upgrade of its new member states; this upgrade would ensure growth in these economies and from there, reduced migration pressures from these countries. 
Another tension we have noticed is a tension among the older and younger generations. The older generations have memories of war, and therefore have an understanding, if not an appreciation for, the non-economic reasons this Union must stand the test of time. The younger generations are looking at this from a primarily self-interest perspective. As a taxpayer, how is the EU benefiting me? This tension became clear to us, when we were talking to one of our European classmates after one of the sessions in Brussels. He was commenting on how as an EU tax payer, he cannot see the value of the EU ensuring that every European citizen has broadband access.   
The next challenge is predominantly political. It is the unwillingness of rich EU countries to fund poorer EU countries that need the investment. A clear example of this is the current Greek crisis, where the fall of Greece could most probably result in the death of the Euro. This unwillingness and indecisiveness puts the whole Union at risk and is mainly driven by the way power is divided in the Union.  In the EU all decision making is at the national level and not the European level. This is reflected on how the European Commission plays and advisory role, while the European Parliament can only recommend. It is just the Council of Ministers that can approve.  With national politicians as decision makers, this puts them in a role where they can easily lose perspective and follow populist demands rather than take leadership stands and make strategic choices. 
The political design of the EU has then resulted in another non-desirable outcome, since the EU institutions are not power centers; they ended up being staffed by tens of thousands of bureaucrats and not political leaders. This has resulted not only in an increase in rules and regulations, but also in a growing disconnect between the general public and the EU, resulting in decreasing confidence of younger populations in the institutions themselves.
The last issue that it is important to point out before looking into the future is the different membership standards that this Union has. New member states have to play by all the rules, while older states can pick and choose the standards they prefer. The table below outlines how different EU countries where to prescribe to different European standards by various members of the Union. 
EU Standards
Czech Republic
England
Estonia
Ireland
Schengen
X

X

Euro


X
X
European Parliament
X
X
X
X
 
Now, after we have summarized some of the very complex challenges the EU is facing, it is important to ask where the EU is heading. How is the future going to look like? What will it mean to businesses and “doing business” in 2020? In our discussions we have identified three possible scenarios, the first is a European divorce, the second is maintaining the status quo, and the third is deeper integration among the EU resulting in further opening of new markets, and reduction of the complexities of doing business in the Union.
 
Let us start by discussing the European divorce. The current course that the EU is on could most probably result in a divorce. The financial crisis facing the PIGS, and particularly Greece, is putting the Union in danger. If the EU bails out the Greeks to save the Euro than they face anger by the Irish who got no bailout when they needed one. If Greece is allowed to leave the Euro in an attempt save its own economy and prevent the collapse of the Euro, this sets a dangerous precedent for the Union. If one country is allowed to leave for their own benefit, what will prevent others from doing the same? This would also encourage new member candidates to negotiate membership rules, and could make standardizing EU membership even more difficult in the future. If the EU fails to save the Greeks, the Euro might be gone, which would result in incurring massive costs to change the currencies, let alone the negative impact on businesses, which would then have to transition to dealing with 27 currencies.  Additionally, it could increase the possibility of hard borders returning, which would reduce the ease and effectiveness of the flow of goods and services between member countries. Europe must avoid this scenario at all costs.
 
The status quo is an attractive option, although quite risky. It allows politicians not to fight for structural reforms that negotiations can put the Union at risk, but only for the politicians to take strong positions when needed, so a proposition to get involved in Greece but not in Ireland. The challenges with this model are plenty; first of all it doesn’t address the structural problems that are causing repeated cycles. Second, it doesn’t reduce risk to the Union itself; it actually increases it as we do not know what kind of political leaders we would have in place when tough decisions are needed. Finally, it does not improve the business environment; it doesn’t make doing business in Europe either cheaper or even easier. Yet, we still call this an attractive option, as it is attractive from the politician’s perspective; it is the road of the least resistance, unfortunately.
 
The Europe of 2020 that we, and to a certain extent the European Commission, envision is quite different.  It is a Europe that is deeply integrated, where the EU plays more of a federal role, and that member states have similar rights and obligations. In this Europe, mobility will be much easier, not just because of a growing Schengen treaty, or better infrastructure, but as well for legislation that furthers facilitate mobility through addressing transfer of pensions, licenses, health care and insurance. In this Europe, business would be easier as both capital and labor could move freely and efficiently. Economic diversification will be possible, as all parts of Europe will have the infrastructure, capital and education to drive growth and innovation; it would not be just limited in the heart of old Europe.
 
For European businesses life would be even easier; a more federal Europe will have the ability to better lobby and pressure foreign governments. This Europe would have one voice that speaks for its foreign policy positions. It would have social, economic and political capital that it could push around to better shape and drive the world we would exist in. This would be particularly critical with the rise of new Eastern powers; a rise of a European power would result in a more multi-dimensional global leadership that would bring balance and perspective onto the table.
 
So how can this European marriage happen? How can we get 400 million people, from 27 countries that speak more than 20 languages, to come together and decide to open their lives and integrate their worlds? How do we overcome the populist fear mongering politicians that cheer for xenophobia? How do we deal with the fact that as Europe unites, the power center will move from the developed old Western Europe, to the hungry and entrepreneurial Eastern Europe?
 
The complexities facing uniting Europe are tremendous. They need many strong transformational leaders, in different parts of Europe that see the importance of unity. They need members state to sit and seriously discuss problems of migration and duplicate membership standards.
 
Unfortunately though, these complexities and diversities are making this Europe we envision almost impossible to achieve. As we scan the political landscape today, we look around for transformational leadership that does not exist. We have some transactional leaders than give us some hope: the hope that they can take a few steps forward by maintaining the status quo, slowly enhancing the integration through initiatives like the 2020 European Digital Agenda that is working on connecting Europeans together and strengthening the infrastructure in economically disadvantaged countries.
 
The beauty of predictions is that the world is full of surprises. With a lack of transformational leadership and with the high pace of change the world has been seeing socially, economically and politically, Europe would have less and less of a say in the future she would face.  As mentioned in our opening, Europe is unlike its older member states; she lacks the wisdom and acts like a confused teenager.
 
Successful countries, just like individuals, are the ones that are able to not just look under their feet, but also have foresight, vision, the will and ability to transform themselves into the future they see. Hopefully, Europe will be successful in doing so, not just for its sake but also for the sake of its citizens, businesses and the world.