How the European Union Can Deliver on its Unfulfilled PromisePublished: February 23, 2005 in Knowledge@Wharton
In his kickoff speech at the Wharton European Conference in November, Jean-Pierre Rosso, who recently stepped down as chairman and director of CNH Global N.V., talked about the challenges faced by Europe as it develops a unified identity and begins to emerge as a global economic player. The European Union, he said, remains a "work in progress," with several hurdles to overcome if it wants to become truly competitive. The conference, titled "Raising the Curtain Over a New Europe," also included a panel on "Transatlantic Business Opportunities."
In his opening remarks, Rosso noted "the excitement and pride around the creation of a unified European market," as well as the "significant hype around becoming a larger market than the U.S." The plan was to promote growth for all countries that became a part of the European Union, and to collectively compete against the economic power of the U.S. "At the same time, there were fears in the U.S. of a 'fortress Europe,'" Rosso said, a Europe that worked to keep other nations out, whose main purpose was "to erect barriers to trade. This didn't happen, but it was very interesting to watch the U.S. reaction as the E.U. was being formed."
Yet despite such high hopes and expectations felt by many within Europe, the E.U. has failed in many ways to deliver on its promises, Rosso said, noting that "economic growth is not what it might have been since the E.U. was formed." First, there were language and cultural differences to overcome in trying to form the E.U. entity itself. "The nations still held lots of power," Rosso said, "and that meant Europe-wide agreements were slow to be implemented."
Second, the purpose and make-up of the new European state "was not well explained to citizens. The politicians were not selling the advantages and benefits of unification -- are still not selling those advantages and benefits." As a result, the E.U. has seen low participation rates in its elections thus far, and according to Rosso, "there is not a lot of enthusiasm in Europe for Europe."
Finally, "Europeans live well, so there is not much of an incentive to change," Rosso said. He alluded to his own strong French national identity, pointing out that with each nation maintaining entrenched traditions and each supporting attractive lifestyles, there was very little power behind arguments asking people to embrace a new pan-European identity, either economically or culturally.
As a result, Rosso described the E.U. as "still a work in progress. We find ways to solve problems, but it just takes time." He identified several large hurdles that the E.U. must overcome if it expects to become a future competitive force. "Look at the rest of the world: The U.S. has growth and productivity advantages. India and China are emerging with large educated populations that will also have growth and productivity advantages. Brazil is actively transforming itself economically. From a global point of view, Europe is losing ground. It must address this imbalance."
How is it possible to do this? Rosso highlighted Europe's "tremendous strengths and enormous advantages": First, a highly educated populace. Second, a large and stable market in which to produce and trade goods. Third, a generally successful common currency in the member states which have adopted it. Rosso pointed to the E.U.'s central bank which is already promoting economic coordination between countries, and noted that the region is self-financing its growth rather than borrowing heavily, as the U.S. is doing. Finally, Rosso cited the potential that Russia and Eastern Europe hold as future growth markets for a unified Europe. "Our greatest strength is our human assets," he said. "I am always impressed by the caliber of people. They are equal or superior to people anywhere else. But they haven't yet delivered on their promise."
What's Next for Europe
Rosso stepped down as chairman of CNH Global N.V. in April of 2004. He was director and chairman of the board of CNH since the merger of Case and New Holland in November 1999 and was its CEO in the first year following the merger. He was also CEO of Case Corp. from 1994 to 1999. CNH Global N.V. is the number-one manufacturer of agricultural tractors and combines in the world, the third largest maker of construction equipment, and has one of the industry's largest equipment finance operations.
Rosso identified three areas of key importance for the future development of Europe as an economic force:
- "We must create a truly integrated domestic market," he said. "The fundamental strength of the U.S. is the integrated, homogenous market that it provides to ground companies in before they go international to compete." Rosso believes it is similarly important for Europe to provide a large, homogenous breeding ground for European companies to flourish in before they go abroad.
- "We must implement more pro-growth reforms," Rosso added. He argued in favor of removing "structural impediments" such as labor legislation and taxation that make it prohibitive for businesses to grow and compete globally. Rosso pointed to Sweden and Finland as prime examples of European nations who have managed to "evolve, adapt to new realities and continue growing without reducing the social net that is so important in Europe."
- Finally, Rosso emphasized that "the future lies in science and technology," identifying a four-pronged approach to supporting Europe's scientific future. "We must increase investment in research; improve the relationship between fundamental research, applied research and industrial development; emphasize innovation; and look at our demography and consider its impact on the future direction of the growth of our markets."
Luxury Brands, Politics and Astroturf
The panel on "Transatlantic Business Opportunities" included John Esposito, CEO of Schieffelin & Co., the fully-owned subsidiary of Moet Hennessy Company that imports and markets Dom Perignon, Hennessy Cognac, and Grand Marnier to the United States; Peter Chase, director of the Office of European Union and Regional Affairs at the U.S. Department of State; Jean-Francois Boittin, minister counselor for Economic and Commercial Affairs at the French Embassy in Washington, D.C.; and Jean-Pierre Rosso. Each panelist presented a 10-minute talk on the state of transatlantic commercial opportunities as well as what the transatlantic relationship looks like from the vantage point of his organization.
"We are the fourth oldest continuously operating company in the country," noted Schieffelin CEO John Esposito. "We began as an apothecary -- you know, delivering wines and spirits during Prohibition for 'medicinal purposes.'" The company is wholly owned by LVMH, the largest luxury goods company in the world, and is responsible for importing and marketing high-profile European spirits brands in the United States, including Dom Perignon champagne, Hennessy cognac, and Grand Marnier liqueur. Esposito noted that the Moet Hennessy division is the company's second most profitable.
As an American running the stateside division of an iconic European company, Esposito has a unique perspective on the transatlantic relationship. "I have always been dealing with products from Europe, and the relationship -- along with the company -- has always been changing. We have reorganized the company four times in ten years. For us, it's all about positioning. We have learned to transcend where our products are from to become a brand in people's minds that goes beyond" national or regional borders.
To illustrate his point, Esposito showed attendees a video showcasing his company's many products and brands -- all of which have European names, but which, he said, have all become brands that are not tied to national identity. As a result, said Esposito, they are able to remain successful in the U.S. market by remaining apart from and above any tensions that arise in the transatlantic relationship, such as recent anti-French sentiment among American consumers following the French-American political divide over U.S. military action in Iraq. "Relationships are strained between France and the U.S. because of the war; there is a lot of anti-French activity as a result. French wine is suffering here in the U.S., but none of our brands are," Esposito said. "Yes, Dior is French, but nobody cares because the brand is bigger than that -- and who wants to throw out Dior? The important thing is we don't market Schieffelin. Many of you may have never heard of Schieffelin before. It’s all about the individual brands."
How do Esposito and his team achieve this? "We constantly think about how to make each brand recognizable as a great brand -- not a European brand, but a great brand, period," he said. Esposito also works to maintain the independence of the teams managing each brand, so that they are free to innovate as they see fit. "We have created a number of entrepreneurial companies empowered to operate globally and develop their own brands. They learn to speak the language of luxury, keeping our products aspirational for the consumer."
Esposito added that a key to his company's success is recognizing the importance of marketing luxury to a multicultural audience. "Sixty percent of our market here is non-white, so our branding is therefore multicultural in nature." The company sells two million cases of Hennessy Cognac each year, while its closest competitor in the American market sells just 500,000. "It is an aspirational product for our core consumer, who is African American. Hennessy is the number-one brand mentioned in rap music." Knowing and embracing its audience helps Schieffelin to constantly influence "what luxury means to our individual consumer. Branding, positioning and luxury is the way to cross all barriers."
"Esposito's strategies are good because they attempt to get above politics," said Peter Chase, director of the State Department's Office of European Union and Regional Affairs. But they illustrate what a huge impact politics has. "Business does not exist in a vacuum," Chase noted. "It is buffeted by politics."
The U.S. relationship with Europe is based on both "strong common values" and a history of transatlantic friendship, according to Chase. "The President wants to improve and strengthen our relationship with NATO and Europe [because] a stronger and more united Europe is in the interest of the United States." In addition, America's status as a lone military superpower does not help in addressing multinational threats such as terrorism, environmental deterioration and organized crime.
"There is a lot more to do to ensure the success of Europe," noted Chase. First, growth in Europe is too slow. Second, unemployment rates remain too high. Third, Europe must "increase research and development, [promote] information and technology penetration, and support an entrepreneurial culture. If these things happen, even if the U.S. does nothing, the relationship will improve as Europe grows."
Under President Bush's "New Transatlantic Agenda," regular summit meetings will be held between American government officials and their European counterparts, Chase said, adding that the President would like to see this support translate into enhanced security efforts being made in Europe as well as an improved European regulatory environment.
"I have a simple message," stated Jean-Francois Boittin, the French minister delegate in Washington, D.C., for economic and commercial affairs. "There exists a transatlantic marketplace that is running so well, and so efficiently, that very few realize it exists." Boittin, who has spent more than seven years in the U.S. in his current position, pointed to numerous examples of transatlantic business transactions that are so commonplace that few Americans take notice: "Notre Dame's stadium is filled with French-made Astroturf," he said. "The commuter rail in Boston is managed by a French company. California exports more to Europe than it does to Japan."
Indeed, Boittin said that the economic relationship between the United States and Europe is valued at approximately $1 billion per day as measured by the Congressional Research Service. Broken down into its component parts, "this comes out to about $50 billion per year in trading goods, $20 billion per year in trading balances and $290 billion per year in investments" in dollars that the U.S. invests in Europe. In return, French investments in the U.S. total approximately $535 billion per year, an increase of 700% since 1990.
Boittin did note several problems in the European-American relationship, however. "It is a marketplace in search of a proper political structure. Right now the WTO negotiates and litigates -- so far dealing with issues of bananas and beef hormones, but it will be handling disputes over Airbus and Boeing in the next few months. Meanwhile genetically modified food issues are already in progress, and the price of pharmaceuticals in the U.S." is a discussion that will take place at some point in the future, Boittin said.
"The main obstacle in the transatlantic relationship is regulation," he added. "It's gone backwards on security. It's gone backwards on labeling. It's gone backwards on financial regulations because of Sarbanes-Oxley. Major firms on the New York Stock Exchange from Germany want out because of the expense of these regulations." At a conference of CEOs seven years ago, Boittin said he heard one executive declare, 'Let's kick the bureaucrats out.' "But it's more complicated than that. For example, there won't be a Congress anytime soon [that is willing] to make a transatlantic agreement of mutual recognition for drugs approved in Europe to be simultaneously approved in the U.S.," Boittin noted. "Issues like these continue to irk Europeans and European businesses. There is no overarching structure over our economic relationship ... which makes things complicated."
In addition to his keynote address, Jean-Pierre Rosso offered three points of discussion that summarized or added to the issues raised by the other panelists: