Even those with only a passing knowledge of European affairs must know that these are heady times in Europe as the continent continues the decades-old process of defining and implementing the idea of “European integration.”

Europe’s disparate governments and economies have grown closer since unification began in the 1950s. The European Union today consists of 15 members and it will expand significantly in years to come with the addition of countries from eastern and southern Europe. Europe’s economies are, on the whole, strong, and European companies have lately demonstrated uncharacteristic aggression in acquiring other firms. Yet stumbling blocks to closer cooperation remain: Not all EU members, notably Britain, have embraced the euro, which recently hit new lows against the dollar, and deep differences exist over the question of whether Europe would benefit from a written constitution.

For an update on European developments, Knowledge at Wharton sought the perspective of one of Europe’s most prominent executives, Henning Schulte-Noelle, chairman of the board of management of Allianz AG, a global insurer and provider of financial services based in Germany. Schulte-Noelle received his MBA from Wharton in 1973.

Knowledge at Wharton: What, in your view, is the ultimate goal of European integration? Should it involve increasingly formal political and economic ties among countries, or something less than that?

Schulte-Noelle: European relations have improved to a degree that seemed unimaginable a few decades ago. Since the fall of the Iron Curtain, we have experienced major improvements in political and economic relations between many European countries. One of these improvements was the formation of what has emerged as today’s European Union with its 15 member states. This European Union is an entity sui generis; it will probably always be less than a federal state but definitely more than its current configuration.

Under the conditions of globalization it is important that political power and regulation be transferred to entities which are larger than today’s European nation states. However, this will also require structural reform: The system of decision-making, especially the current principle of unanimity, will have to be altered toward one of majority decisions. Not only would this speed up the political work, it would also strengthen the responsibility and visibility of the European Parliament and the European Commission. Integration is an ongoing process and therefore it wouldn’t be helpful to set ultimate goals in this context. In the spirit of subsidiarity, the citizens of Europe will decide on the pace and depth of this integrational process [Subsidiarity is the idea that the EU would not seek legislation on issues better left to national and local governments.]

Knowledge at Wharton: Is the movement toward integration proceeding at a proper pace and in the proper way? French President Chirac called this summer for a ‘pioneer’ group of countries to move ahead with plans for a European Union of nation states with a constitution. Is this a good approach?

Schulte-Noelle: Similar ideas were initially presented by German Foreign Minister Joschka Fischer in May 2000. Yes, we need a pioneer group of countries who feel a special responsibility for advancing European integration. Even though every country has its own unique speed which we must respect, there are trailblazers that could pull along others. And the time might well be right to think about new, bold steps toward creating a European constitution. As recent polls indicate, an average of 70% of the population in the European Union is in favor of creating such a European constitution.

Knowledge at Wharton: How would you assess the progress that Europe has made on integration over the last decade and what is your outlook?

Schulte-Noelle: Considerable progress has been made, as for instance the implementation of the single integrated market, the beginning of the third phase of the economic and monetary union, the conclusion of the Amsterdam treaty and increased foreign policy cooperation, in particular in the fields of defense and security policy. [The Amsterdam Treaty was a 1997 pact in which EU members agreed to continue with the process of integration spelled out in the 1992 Maastricht Treaty. The Maastricht Treaty was a major step toward European integration in that it, among other things, created the EU (to replace the European Community), established economic and monetary union, launched a common foreign and security policy, and endorsed the notion of subsidiarity.]

As I had mentioned earlier, these are steps that were unthinkable even ten years ago, and there will be more progress to come: The eastward expansion of the European Union is politically important and offers interesting perspectives in economic growth with Europe gradually becoming a single market of more than 400 million people. The current French presidency [of the EU] has an important task in setting the framework for the future development of the European Union and deserves every possible support from Germany in view of the upcoming European Summit in Nice, France, in December 2000.

Knowledge at Wharton: Does close cooperation among European countries mean stronger economic growth and lower unemployment?

Schulte-Noelle: A true European internal market has largely been put in place and we are beginning to see its far-reaching structural impact, unleashing a growth potential that had previously been locked into national borders. Nevertheless, at this point the major contribution to greater economic growth and lower unemployment has to come from member states of the European Union. They will have to curb their budget deficits, reduce state influence in national economies by privatization, lower taxes, create a business-friendly environment and remove exaggerated rigidities in their labor markets. Fortunately the European Union itself has been nudging its member states in the right direction, for instance by monitoring the development of their budgetary situation, pushing for privatization of state industries and fighting against subsidies to ailing branches of the economy. Europe has begun to move and further structural changes lie ahead of us making the European Union a more competitive entity on a world scale.

Knowledge at Wharton: Europe’s economies have been strong in recent months. To what do you attribute this economic growth?

Schulte-Noelle: Economic growth in Europe has lately been picking up but it still lags behind U.S. growth rates. The psychological climate has changed for the better. The percentage of people – and in particular entrepreneurs – looking into the future with optimism has risen. Why is this so? Obviously the decline of the euro versus the dollar has given a boost to European exports particularly into the United States. Many European countries have made reasonably successful efforts to reduce their budget deficits. Some have started reforming their bloated pension systems and taxes are being lowered over the whole continent … Europe is moving in the right direction and my guess would be that the business climate will improve even further and push up our growth rates.

Knowledge at Wharton: What stake does the United States have in the economic and political integration of Europe?

Schulte-Noelle: We can expect a politically and economically integrated Europe to be peaceful and prosperous. This Europe might well be an economic competitor of some weight for the United States. But it would also be a reliable and friendly partner both in the economic and political spheres, enhancing the influence of the Western-type democracies in the world and thereby promoting democracy and human rights on a global scale. The fact alone that no more internal conflicts would wreak havoc within Europe would be greatly beneficial to the United States and the world as a whole. For the United States – by any standard the most influential and powerful country in the world today – it is important to have strong like-minded partners in the world in order to prevent an over-stretching of its resources in trying to maintain world peace and further prosperity on a global scale. An area in which Europe needs to catch up is university education: Too many talented people choose to go to the United States because Europe doesn’t offer enough in this field. But in general, all our efforts should be directed at preventing the differences in certain commercial but also social and security issues from damaging the crucially important ties between the North American continent and Europe in general and the European Union in particular.

Knowledge at Wharton: The euro has fallen against the dollar since it was introduced. What impact has this had on your company and on the German and European business communities in general?

Schulte-Noelle: Europe is an exporting region. Therefore it is to its advantage if the currency is not overly strong. A weak euro means that it is easier to invest in Europe from abroad than it is for Europeans to do so in countries outside of the euro zone. The U.S. economy has seen a more dynamic development than the economies of Europe in recent times. Once this development aligns, I expect the euro to increase in value, too.

Knowledge at Wharton: Hostile takeovers, a common occurrence in the U.S., have been rising in Europe. Why is this happening and what significance does it hold for the European business community going forward?

Schulte-Noelle: The expressions used in this context, such as “hostile takeover”, “merger of equals”, “friendly takeover”, etc. mostly describe an assessment that is not necessarily reflected by the capital markets. Hostile takeovers are something fairly new to continental Europe but this will probably change in much the same way as we have become used to mergers on a European or even global basis. The European takeover directive is currently under preparation and a German takeover law will be passed later this year. Maybe we shouldn’t look at mergers and takeovers as friendly versus hostile or national versus international but instead focus on whether there is an increase in value for the groups of stakeholders affected by it.

Knowledge at Wharton: Do you foresee a day when personal income taxes and business taxes will be levied by pan-European authorities?

Schulte-Noelle: The old adage, “No taxation without representation,” still holds true. The levying of personal income taxes and business taxes by the European Union would presuppose a new treaty, conferring the power to adopt tax laws on the European Parliament, laws which could then be administered by the European Union executive. But not everything must be levied. Economic development can profit from competition between the different political and economic systems.