DISCLAIMER

This document summarizes the perspectives of 60 European company heads, senior executives and experts interviewed by Bain & Company. It does not represent the opinions of any individual and is not intended as a complete or exhaustive set of recommendations to the recipients of this document. Rather, it is a summary of different and sometimes contradictory perspectives, and reflects the insights of leading figures in the European economy on the subject of competitiveness in Europe.

Italicised statements are quotes of contributions recorded verbatim during these interviews.

The interviews and summary report were produced by Bain & Company, which as author takes full responsibility for this work.

ACKNOWLEDGEMENTS

First and foremost, we wish to thank all the senior executives and experts who took the time to meet with us and share their points of view and proposals.

We are of course especially grateful to Mr Pierre Lequiller, President of the French European Affairs Commission, who made this work possible by agreeing to receive the white paper, which summarises these opinions and the research carried out by Bain & Company, at the French National Assembly.

Further special thanks are due to Mr Philippe Citerne, Chief Executive Officer of Société Générale, to whom we are indebted for the initial idea of this white book and for his friendly support all along the project.

FOREWORD

This document, submitted to the French National Assembly on 25 November 2008 by Bain & Company, a global strategy consultancy, summarises the perspectives of 60 senior executives of European companies representing more than $1000 billions in turnover in 2007 and some 3 million employees. Sixty economic decision makers agreed to share their experiences and insights to contribute to discussion of a new state of competitiveness in Europe.

Their perspectives are particularly significant at a time when the world is bearing the full brunt of an economic and financial crisis of a scale not seen since 1929. Its principal aim is to suggest long-term guidelines to strengthen the competitiveness of Europe and its companies. The challenge of restoring stability to the global financial system—a crucial question for all businesses—was also central issue raised repeatedly by the participants in this project. It has not been analysed in this document since its exceptional scope would require more in-depth analysis.

This document is structured in two parts:
— First, a "snapshot" of European competitiveness, which aims to describe its weaknesses and missed opportunities as well as its advantages and potential.
— Second, summaries of the improvements suggested by our interviewees, which were practical and sometimes radical in nature, informed by the pragmatism of business leaders with an intimate understanding of the challenges and expectations ahead.

One observation is immediately apparent from these interviews: there is a sense of urgency about the need to overcome the institutional deadlock of the EU through more effective governance. The every-man-for-himself approach to handling the financial crisis is only the most recent example. Those interviewed frequently express high expectations in terms of stronger political leadership and a more proactive approach to addressing major issues. The participants also voice concern and broad criticism of the inefficient and cumbersome nature of the EU's decision-making processes and bureaucracy. A significant majority of participants consider that far-reaching reform of the governance of European institutions is a prerequisite to any policy which aims to improve the continent's competitiveness. They also criticize the lack of coordination of economic policies, and warn against the temptation to withdraw to nationalist and protectionist positions. The business leaders interviewed express concern that the EU appears to have difficulty exerting an influence on the international scene, despite being a leading world economic power.

A second set of observations raise concerns about the incomplete nature of the European internal market and the limits of a policy which has over-emphasised the application of the rules governing competition. While European integration has been successfully carried out in many industries, the picture is far more varied in the service sector which accounts for more than half of the EU's gross domestic product. The lack of coordination in banking supervision has become acutely apparent in the financial crisis.

Over and above this set of concerns, four major themes emerge from our interviewees' perspectives on taking up the challenges of global competitiveness:

• Education and innovation, with particular emphasis on three broad needs: promoting scientific and technical training and the related sectors; strengthening the attractiveness of Europe for knowledge workers in order to win the global battle of intelligence and innovation; and promoting funding for young, innovative companies.
• Targeted support policies, which are relatively lacking in Europe while the United States, Japan and China are all actively involved in assisting their national champions. Among the possibilities raised by those interviewed: supporting strategic technologies and market segments; defining how their expansion can best be supported; reinforcing the charter of the European Investment Bank with regard to funding of such targeted initiatives; creating world-class competitiveness clusters.
• Infrastructure, which requires ongoing investment. Europe has top-ranking infrastructures and has begun to interconnect national networks—a strategic component of its competitiveness. Nevertheless, significant investments are still needed in fields such as freight, telecommunications and the transport of energy.
• Lastly, energy and the environment, which are fields where Europe has become a world pioneer. European companies have established themselves as forerunners in certain segments of the "green" economy. Europe needs to ensure such positions are consolidated and expanded. One proposal in particular predominates: acquiring a European-level, public/private-sector body to coordinate research and development work in the field of renewable energies and the environment.

Lastly, in addition to these four topics, the contributing business leaders emphasised the need to pursue unification of the European internal market and the benefits of greater social and fiscal harmonisation. They also underlined the importance of greater protection of European companies and their intellectual property, as well as the need for a rapid review of the rules governing competition.

The 60 senior executives interviewed all favour ongoing development of the EU and emphasise the major successes achieved. They are also united in their frustration at the impotence of European institutions and express a desire for a fresh affirmation of political leadership.

Rapporteurs:

Philippe De Backer, partner and Olivier Marchal, managing director for Europe, the Middle East and Africa

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CONTENTS

1. EUROPEAN COMPETITIVENESS: FIFTEEN YEARS OF CONTINUOUS DECLINE

A. An environment characterised by sluggish growth
B. European strengths
C. A poor start in the battle over new technologies
D. The new challenges for competitiveness
E. Europe and the economic and financial crisis

2. RECOMMENDATIONS FOR EUROPEAN RENEWAL

A. Reform of the operations of European Institutions
B. Demographics, education and skills renewal
C. Establishing an industrial strategy
D. Strengthening infrastructures to create a competitive advantage
E. Developing the strategically important energy and environment sector in a more proactive and coordinated fashion
F. Completion of the internal market
G. Harmonising taxation and welfare
H. Better protection of European businesses, especially their innovations and intellectual property
I. Overhauling the rules governing competition

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1. European competitiveness: fifteen years of continuous decline

A. An environment characterised by sluggish growth

Weak growth in gross domestic product and productivity

Over the last 15 years, growth in the Eurozone has been one percentage point lower per year on average than in the United States. The difference in wealth between Europe and the United States has widened, and per capita GDP across the 27 EU member states is now 50 per cent lower than that of the United States.

Two key parameters should be noted: first, the continuing influence of the countries that made up the EU when it had 15 members, accounting for 72 per cent of the GDP of the European Union in 2008; second, the service industry's importance, contributing approximately 50 per cent of the GDP for the 27-nation EU.

This difference in growth rates is, for the most part, the result of a slowdown in productivity gains in Europe. This trend dates back to 1994, when the annual productivity growth rate in the United States began to outstrip Europe. The gap widened over the following 10 years. Although European growth improved slightly in 2005, United States productivity still is 38 per cent higher than Europe. Two factors are involved: on average, Europeans work fewer hours (1,624 hours per year per employee compared with 1,819 hours in the US). And Europeans' hourly productivity is lower.

European Commission studies indicate that Europeans' lower hourly productivity rate is influenced by three major factors: the development and dissemination of information and communication technologies; research and innovation; and market regulation (labour, environment, standards and so on).

A lower employment rate in Europe compared with that of other major economic entities

Another unfavourable comparison is the European employment rate for 15- to 64-year-olds, which is more than 5 points lower than that of the United States and Japan (74 per cent and 70 per cent, respectively, as opposed to 65 per cent for the EU in 2006), even when factoring in a two-point improvement since 2000. Within Europe there are significant differences:
— five countries have an employment rate of more than 70 per cent: Denmark, the United Kingdom, Sweden, Finland and the Netherlands
— three nations suffered a drop in their employment rate between 2000 and 2006: Poland, Portugal and Romania.

The OECD's explanation for this comparatively low employment rate is the high overall cost of labour in Europe, particularly unskilled and semi-skilled labour. Germany represents one example of a strategy for controlling salary costs. Its "Agenda 2010" (decreasing wage costs, reducing the duration and amount of unemployment benefits, relaxing labour legislation and pushing back retirement age) has made a significant contribution to renewing growth, helping to spur the growth of German exports since 2005.

Challenges that the Lisbon strategy failed to engage

In March 2000 at the European summit in Lisbon, the European Commission spelled out its vision for Europe: "Becoming the most competitive knowledge-based economy in the world, capable of sustainable economic growth accompanied by more and better jobs and greater social cohesion."

This strategic vision encompassed a number of objectives:

• Strengthening innovation by devoting 3 per cent of the GDP to research and development
• Speeding up structural reform, in particular the completion of the internal market
• Modernising the European social model with the aim of raising the employment rate to 70 per cent across the Eurozone
• Coordinating macroeconomic policies

The tangible results have been disappointing. Member states' performance, with respect to the established objectives, has varied widely, with the "large countries" (in particular France, Italy and Germany) performing below the initial targets. Overall investment in R&D has amounted to only 1.8 per cent of GDP, and the rate of employment has levelled off at 65 per cent, hampered by major differences in social models, with no real shift towards a more unified position. In 2005, following the Kok report, the objectives were refocused on two major issues: growth and employment.

B. European strengths

Nevertheless, acknowledgement of these failings should not obscure the Europe Union's strong assets:

An attractive geopolitical position with low-cost countries and prime access to the Mediterranean region

An increasingly unified and large market compared with other major economies

Dynamic financial centres (London, Frankfurt and Paris), which enable European businesses to raise capital in markets with a global scope, even taking into account the recent turmoil in the global financial system

— A stable monetary policy since the inception of the euro, which now is on competitive footing with the dollar: the share of the euro in world reserves is steadily increasing (approximately 25 per cent today compared with approximately 20 per cent in 2004) whilst the dollar is decreasing (approximately 66 per cent at present). The share of cross-border trade carried out in euros now is equivalent to trade conducted in dollars

— A high proportion of world leaders in industry and services

• In mid-2008, Europe had 147 of the 500 leading global stock market capitalisations-as many as in 2000, while US capitalizations fell during the same period from 212 to 168
• Expertise in key technologies

— National and transnational infrastructures, often well developed, in a variety of fields

• interlinked motorway networks
• development and increasing interconnection of high-speed rail networks
• energy networks
• gradual integration of sustainable systems in new infrastructure programmes

— Strong cultural and historical diversity, an important source of creativity and talent for managing complexity

— High levels of education

•  a proven capacity for training top-level engineers and executives with universities ranked among the best in the world (although they are mainly recognised for research, not their ability to prepare students for careers in business)
•  the success of the Erasmus programme, which facilitates the integration and cultural mobility of young Europeans

As one of our interviewees put it: "In spite of its ageing structure, it should not be forgotten that Europe still has a productive, innovative and healthy economic fabric."

C. A poor start in the battle over new technologies

Given its potential to innovate new technologies, Europe has played a modest role. There are two main reasons according to our contributors: insufficient research and development efforts and a higher education and research system that is insufficiently geared to the business world.

Research and development investment has levelled off

Despite the "Lisbon strategy's objective of devoting 3 per cent of GDP to research and development, European R&D expenditure has levelled off since 2000, ending at just 1.8 per cent of GDP in 2006.

In 2006, only Finland and Sweden exceeded the 3 per cent threshold, with four countries (including France and Germany) investing between 2 per cent and 2.5 per cent of GDP and another 10 countries spending less than 1.1 per cent. R&D investment by the three main European contributors to R&D spending (France, Germany and the United Kingdom account for roughly 60 per cent of the EU total) has levelled off, or even dropped in the case of France and the United Kingdom.

The European shortfall in developing digital industries directly results from this lack of R&D investment. The technology industry is largely dominated by the United States and Asia, although Europe does have some recognised leaders, such as the Finnish company Nokia.

In two major fields enjoying strong growth-new information technologies and biotechnologies-Europe has failed to produce world-class champions (apart from rare exceptions such as Nokia for GSM and SAP for corporate management software applications). Faced with leaders such as Google and Amgen, the European industry appears fragmented and incapable of implementing the human and financial resources necessary to occupy significant, leading positions.

One of Europe's key assets for growing future industries is its strength in the energy and environment markets, through both multinationals and innovative SMEs. Europe's current advantage stems mainly from an early awareness of environmental and energy issues. Sustained investment is required in order to maintain this lead, particularly given the increasing attractiveness of the "green economy" for international venture capitalists, who could move quickly to finance the rapid expansion of US competition.

One interviewee commented: "The world is currently fascinated by the growth of emerging nations, such as China, that rely on the mass of low-cost labour available to them. Nevertheless, tomorrow's worldsuch as the technologies enabling the development and management of the cities of the future-will continue to be invented in Europe, the United States and Japan."

Lack of investment in higher education

The US higher-education system, particularly for research and development, is a magnet for brilliant students from around the world. They are attracted to US universities because of several critical attributes: major US academic centres provide access to highly prized resources, while at the same time encouraging cross-pollination of skills. Meanwhile, their highly developed links to the business world help ensure that advances made by their researchers and students are converted into economic and industrial success stories.

European spending on higher education is significantly lower than in the United States, especially when it comes to private investment (1.6 per cent of GDP in the US compared with 0.3 per cent for the United Kingdom). The difference results from higher rates of corporate investment in the US and support from philanthropic foundations and private individuals.

In addition, while the education ratio  of 18- to 24-year-olds is approximately the same in the United States and in France (approximately 78 per cent), the percentage of over-25s who have completed at least upper secondary education remains far lower in the 27-nation European Union (70 per cent) than in the US (86 per cent).

D. The new challenges for competitiveness

Maintaining and improving competitiveness will require Europe to respond effectively to four major challenges raised by those interviewed: its ageing population, the rapid expansion of the EU and the integration of new member states, the United States commitment to maintain its leadership, and the rise of major emerging nations.

An increasingly ageing population

"The degree to which Europe is paralysed is closely linked to the way in which it is ageing; Europe has grown too old to be taking risks and innovating."

On the basis of current trends, Europe will be the only major economic power in the world to experience a decline in its population by 2050. Its birth rate is the lowest in the world, with the exception of France, where the birth rate is more than the 2.1 children per woman required to maintain population levels.

As a result, the proportion of the active population is expected to continue falling, creating a major age pyramid problem. This means that companies located in Europe will face major challenges in terms of renewing their workforces. A decline in motivation for competition and innovation is often associated with the ageing of the continent.

The ageing population also is accelerating concerns about the European social model for pensions and healthcare. The amount of social contributions made by European companies already is a drag on their competitiveness, with costs continuing to rise as the population ages.

Rapid expansion of the EU and integration of new member states

Another significant challenge grows out of the ongoing expansion of the EU and integration of new member states. This is contributing to greater economic and social disparities within the European market, making governance considerably more difficult.

The difference in per-capita GDP among the "mature" EU nations and the less developed countries differs by a factor of between 1 and 2, and as much as 9 between the two extremes (Luxembourg and Bulgaria). The average hourly cost of labour also varies considerably, by up to a factor of 5.

This disparity poses some crucial problems. First, it presents a challenge to maintaining sufficient macroeconomic coherence, particularly within the Eurozone. Second, Europe faces a trade-off between increasing convergence on the one hand and maintaining strong competition between member states on the other, particularly in the areas of employment issues and labour costs. In addition, Europe will be pressed to preserve or improve competitiveness while having to consider highly disparate issues depending on the level of development and maturity of each nation.

The renewed desire of the United States to hold on to its lead

Despite an official policy supporting the free trade, the United States has always made sure it has the means to maintain and improve its competitiveness through the pragmatic use of various tools. They include:
— softening competition rules when the interests of American industries are at stake, such as the Boeing-McDonnell Douglas merger or curtailing federal lawsuits against Microsoft
— a clear determination to prevent certain sectors from becoming controlled by foreign interests (for instance, by prohibiting foreign investors from gaining majority stakes in airlines)
— support by the federal government or its institutions for industries during crisis periods (like recent government aid for the banking and insurance sectors)
— restricting the extent to which non-US firms may bid for public tenders in certain sectors

The US also has a long tradition of supporting innovative industries in fields such as information and communications technologies, nanotechnologies and space exploration. Military spending, which remains a major government expenditure (approximately 5 per cent of GDP) provides funding or co-financing for investments in R&D. The resulting innovations often have civilian applications helping to maintain a high level of innovation across the US economy.

The current US economic situation will undoubtedly require a certain amount of rationalisation, but the new administration already is unveiling recovery initiatives, particularly with respect to the "green" economy.

The rise of major emerging nations

The last decade has witnessed the rapid rise of the major emerging nations like Brazil, Russia, India, China, Mexico and Indonesia. The economic expansion of these nations has had a number of effects: High rates of growth based on improved competitiveness and low labour costs
— Increasing investment in education and R&D
— Increasingly innovative local companies with growing international ambitions
— Continually improving infrastructures
— Increasing openness to foreign capital and investment

China is one leading example: The rapid stock market capitalisation of Chinese companies is a significant indicator of its growing economic and industrial development: In 2000, the leading 500 capitalisations worldwide included 6 Chinese companies; by 2008, this number had grown to 24, with three companies in the top 20.

This growth abroad is increasing pressure on European countries, both in terms of exports, as they seek to penetrate rapidly growing markets in these nations, and as they work to maintain their positions in domestic markets, where new competitors are appearing. It also means that investors are increasingly turning their backs on Europe in favour of opportunities in emerging countries.

In the long term, growth in emerging markets may slow as their populations push for improved conditions. But for now, limiting their competitive advantages remains a key challenge for Europe.

"The question before us is as follows: in 15, 20 or 30 years' time, when nations like China, India and Thailand have caught up with the standards of living of Western countries, will their costs still be lower than ours? It is then that we will know whether we have won the battle to improve our productivity."

E. Europe and the economic and financial crisis

Several business leaders interviewed for this report expressed their concern over the current turbulent economic situation. One senior executive summed up their point of view

"The individualistic, every-man-for-himself reaction of European member states in response to the financial crisis raises the spectre of decoupling and may threaten the stability and sustainability of the euro."

Improving European competitiveness and turning the objectives of the Lisbon Strategy into concrete realities has become an even more sensitive issue in light of the economic and financial crisis.

Business leaders interviewed were clear on the issues:

"Venture capital must be encouraged, as must credit facilities for young, innovative companies, since these are key elements for their development."

Funding of SMEs, especially innovative companies, is currently coming under stress since banks are reluctant to lend—despite the measures taken by governments—and due to the unprecedented difficulty of accessing financial markets.

Investment expenditure may suffer from budget imbalances affecting all European nations (especially smaller countries), with spending cuts in such vital areas as education and infrastructures.

Major projects relating to energy and the environment run the risk of being delayed: restrictive regulations in a difficult economic climate may lead companies to pass on them. This means that Europe could lose its pioneering position in this sector, along with its ability to influence environmental regulations.

Faced with the complexity of this crisis, Europe runs the risk of returning to state and nationalistic protectionism, instead of adhering to a coherent, unified approach to dealing with problems, one that bolsters European competitiveness. These strategies for improved competitiveness already have suffered from a lack of governance, and the current crisis may well prolong and exacerbate this situation.

It is important to emphasise that the 60 senior executives interviewed are all fundamentally in favour of European cohesiveness and point to major successes achieved. However, they all share a similar frustration at the impotence of European institutions on several fronts. They also want to see a fresh affirmation of political leadership.

"For competitiveness in Europe to be transformed, there need to be competitive leaders in Brussels."

2. Recommendations for European renewal

"The walls dividing business and politics need to be broken down in order to enable these two worlds to sit down and discuss the issues together."

The options identified by the company heads and experts who took part in this inquiry can be summarised in two broad categories for European improvement and renewal:
— Areas that require an extensive review of the current framework and operation of European institutions:

• Reform of the operations of European Institutions 
• Demographics, education and skills renewal
• Establishing an industrial strategy
• Strengthening infrastructures to create a competitive advantage
• Developing the strategic energy and the environment sector in a more proactive and coordinated fashion

— Areas to pursue for major improvements:

• Completion of the internal market
• Harmonisation of taxation and welfare
• Stronger protection of European companies and their intellectual property
• Overhauling the rules governing competition

A. Reform of operations of European Institutions

"When it can be seen that amidst the worst global upheaval in a century, Europe is incapable of better coordination of its banking supervision, the future of its governance is clearly a legitimate cause for concern."

"A clear political lead which steers clear of the extremes both of laissez-faire and of interventionism and planned economies is called for."

Governance emerges as the most significant topic discussed by our interviewees, both in France and in other European countries. The stark choices presented by the current economic crisis highlight the far-reaching influence of government decisions: a joint response to the economic challenges, or succumbing to the temptation for each nation to withdraw into protectionism.

The Lisbon Strategy's failure is first and foremost a failure in its governance. This view is shared by all the economic decision-makers that were interviewed. However, while there is a broad consensus on this point, the proposals for reforming European economic governance differ in terms of procedures. Most suggestions can be grouped into two major areas:

Business leaders suggested ending governance based on the principle of unanimity and adopting a new version of the Treaty of Lisbon at the earliest opportunity. They urge adoption of qualified majority voting on all major issues, particularly economic issues. The failure to agree on European banking supervision, debated during the meeting of European Council of Ministers at Nice in October 2008, is viewed as a prime example of why reform is needed.

"As things stand, the way Europe works is very simple: one small nation holds everything up, larger countries are far too nationalistically inclined to take offence and then hide behind this state of affairs to maintain the status quo!"

"The 27-nation EU needs to recover a flexible dynamic centred on a group of more highly-involved nations. At present, the requirement of unanimity paralyses the whole decision-making process."

The ideas advanced by business leaders interviewed for this report included:

• Enabling the emergence of European economic governance, with clear authority for coordination of macroeconomic policies. The key participants should be a number of pioneer countries, the president of the euro area and the president of the European Central Bank. Many contributors made the case for strengthening the Eurogroup, particularly during a time of economic tension when the stability of the euro could be affected.

"The euro area needs to be strengthened by being institutionalised; informality proved its worth in the 1970s, but is no longer valid today: governance is robust only if it has acquired political legitimacy."

While some of those interviewed think any such reinforcement should remain informal, a large majority argue in favour of stronger capabilities at the European level in terms of budgetary and fiscal policy. They stress the importance of close coordination with the European Central Bank, including support for economic activity-over and above simply keeping inflation under control.

"The European Central Bank needs to be more flexible in its workings; the strong euro has already forced us to outsource some of our export product range to Asia."

• Some of our contributors believe that the euro area also needs closer links with the United Kingdom for improved macroeconomic coordination.

"Creating governance based on a strengthened euro area in association with the United Kingdom is absolutely necessary"

• Increasing the EU budget, presently capped at 1.27 per cent of GDP, by transferring funds now managed by member states to provide a strong boost to flagship competitiveness projects under clearly identified leadership
  "It is important that everything related to the definition of the euro should be dealt with up at the European level: a budget, decision-making, and the capacity of the European Central Bank to intervene"
• Some economic decision-makers think that increasing  the EU budget also should entail a decrease in national budgets in areas where there are transfers;
• Delays and breakdowns in oversight of the Galileo project (a satellite navigation system) illustrates the weaknesses in governance. The SEPA, a strategic banking industry initiative to standardise payment methods within the Eurozone, appears to be doomed because of a lack of effective leadership and willpower. Projects on a European scale call for true leadership at a European level, either in the Commission or by a council where decisions can be made by a simple majority vote on decisions on issues of competitiveness, and where there are adequate resources to support effective governance.
• A minority of the economic decision makers interviewed go further by expressing a desire for a complete overhaul of European Union governance, suggesting a reduction in the number of institutional layers and the gradual disappearance of nation states.

The necessary restructuring of European governance also raises the strategic question of the preferred means of action. Reforming the role of the European Investment Bank (EIB) comes up repeatedly. Historically, it has focused on economic cohesion and convergence, but recently the bank has redirected its focus, with an emphasis on innovation, reflected in the "Innovation 2010" initiative (i2i).

One possible way to strengthen the EIB's role in funding competitiveness is to broaden its bond loan capabilities, allowing the bank to guarantee thresholds and credit allocations to innovative SMEs. This European response could be accompanied by the creation of a body to coordinate European competitiveness policies.

B. Demographics, education and skills renewal

"The only opportunity for competitiveness in expensive countries lies in constant innovation."

The significant ageing of the European population raises the twin challenges of adjusting systems for healthcare and care for the elderly and strengthening investment in the education of younger generations. In addition to action in these two major areas, this demographic change lends a fresh urgency to the need for a more open and coordinated immigration policy, interviewees said. This review should include consideration of non-European populations possessing skills that complement those available within the 27 EU member states.

In terms of education, the global battle to attract and retain the most qualified, innovative and creative talent remains at the heart of this issue.

Many of the best-ranked universities for foreign students are located in the United States. Their lead is undeniable funding, research laboratories and in their contribution to the emergence of world-class academic clusters such as those in California (Stanford and Berkeley) and Boston (Harvard and MIT). In order to compete on equal footing with major American universities, interviewees said, Europe must significantly increase investments in higher education and ensure that resources are focused on the qualifications that will be needed in the future.

"Education must be the priority: training the best students and attracting the best foreign students. To achieve this, we must avoid fragmenting the education system and set up academic clusters bringing together graduate schools and universities."

For instance, it was noted that all European nations are confronted with the need to make scientific disciplines and professions (researchers, engineers and technicians) more attractive. This should begin well before the university level.

"Europe is going to be faced with a major shortage of engineers and technicians. We estimate that there will be a shortage of 700,000 personnel trained on IT networks in Europe within the next five to 10 years."

"Europe has the capacity for training top-level engineers and managers; its weakness resides in the fact that it manages to train only a few. It is vital to increase the number of engineers, scientists and technicians."

Business leaders offered four suggestions to strengthen the impact that higher education has on promoting a knowledge-based economy:

• Encourage increased networking and stronger relationships between major European universities through financial incentives to become more competitive in research (some suggest going as far as mergers, for example between the Universities of Heidelberg and Leyden)

"Companies merge; perhaps it is time to merge universities, especially on a European basis"

• Give the Erasmus programme greater impact by making it virtually mandatory to spend an academic year on an exchange in another European country

"There needs to be more information about Erasmus and its scope needs to be extended; at present, only a tiny part of the European student population is concerned."

• Define a common immigration policy for "knowledge workers" and skilled workers, with the twin objectives of attracting these skills to Europe and encouraging professional mobility within the European Union.

"It is not possible to attract brains from all around the world without a specific, coherent immigration policy."

The European "Blue Card" project, which targets highly-qualified immigration as a priority, is a step in this direction, interviewees said. Nonetheless, several said this measure remains limited in scope and does not enable true mobility within the EU. On this point, contributors argue for the creation of a European "green card."

• Ensure coherence among the status of teaching researchers and encourage increased mobility, along with common incentive measures aimed at strengthening their relations with business. Businesses should be take the lead and have more direct oversight of these fundamental innovation programmes

C. Establishing an industrial strategy

"In 1985, there were 500 world market segments; 20 years on, there are now thousands, and Europe is lagging behind competitors who are promoting champions in each segment!"

Although this opinion expressed by one business leader reflects the urgent need for Europe to arm itself for world competition, there is considerable disagreement among those interviewed for this report about which strategy should be adopted.

European decision makers have diverse opinions on the topic, with two major groups—those who advocate a stronger role for European institutions, and those in favour of minimum interference by the public sector in industrial decisions:

"If you look at the principal industries worldwide, you see the establishment of American and Asian giants, whilst Europe is afraid of consolidation. It is high time we consolidated whole swathes of our industries."

"I don't believe in sectorial plans or industrial policies. Europe unsuccessfully attempted major programmes in favour of the components industry in the 1980s. It didn't work. Investing in education and infrastructures and freeing up the labour market are the key components of a good competitiveness policy, rather than that sort of thing."

The major themes that emerged included:

• The need to identify strategic growth segments for Europe and define ways to better support businesses currently operating or being launched in these growing markets

"There is a need to launch unifying projects focused on competitiveness clusters in fields such as energy, health and the environment."

• The creation of a European agency to support industrial innovation along the lines of the MITI in Japan. This frequently mentioned idea aims to equip Europe with an agency that promotes coordination and decision-making between private and public stakeholders. It also would be responsible for selecting strategic industrial projects for the future.

"Europe should set up a system similar to the MITI in Japan, rather than fund allocation systems that don't work. There is no real cooperation between European institutions and businesses, which could take place for instance by means of joint teams. Europe needs to be actively committed to the projects and success of its businesses."

• Defining competitiveness clusters that would give European business a world-class role; this frequently-mentioned idea would promote a concentration of European capital, infrastructure and business focus.

"Current thinking with respect to competitiveness clusters leads to a scatter-gun effect: we should be concentrating our efforts and investments in a very small number of competitiveness clusters on a national or even European level."

"Enabling multinationals to benefit from the R&D tax relief system is a terrible mistake; a much better industrial policy would be to allocate this exclusively to innovative SMEs."

• Support for establishing European champions to more effectively take on American and Asian rivals.

"There is a crying need for a European industrial dynamic similar to that implemented to save the banking system; we still take an every-man-for-himself approach in areas such as defence and energy."

The launch of a "telecommunications equivalent to EADS" has been suggested to counter, for instance, the establishment of global telecommunications companies based in the United States and China. The same thinking can be applied to air transport, chemicals, and the banking industry, although the inter-country synergies in this sector are more difficult to achieve because of cultural and regulatory disparities.

D. Strengthening infrastructures to create a competitive advantage

The high quality of European infrastructure for transport and energy should not conceal the fact that development of rail freight and fibre optics is lagging behind other major economies. Europe could build a stronger competitive advantage if major European networks were completed. It was the objective of a major infrastructure project worth ?1,000 billion launched in 1993 by the European Commission under the presidency of Jacques Delors.
On this point, economic decision makers recommend that Europe should give fresh impetus to the major trans-European networks-the necessary accompaniment to the completion of the European internal market. Business leaders identified four priorities:

• Elevating the modernisation of infrastructure to a top priority
• Blending European standards in key industries and setting up specific European regulators for each industry
• Favouring public-private partnerships as the main instrument for making investments
• Launching joint initiatives for key installations

"Political willpower and resources need to be brought to bear to develop the digital infrastructures which can come with applications over and above entertainment, generating improvements in productivity such as teleconferencing and e-learning."

"Productivity and levels of use of transport infrastructures need to be improved significantly."

E. Developing the strategic sector of energy and the environment in a more proactive and coordinated fashion

Many business leaders want to see a green Europe that is capable of maintaining its advance in these key fields to ensure future growth

"We need to maintain our lead regarding sustainable development and get it out of our heads that it runs counter to Europe's productivity and competitiveness. Ultimately, expertise and leadership in this field can only be to our benefit."

Energy and the environment constitute two key areas for the competitiveness of the future. Denmark, Germany, France and Italy are well-positioned, especially with renewable energies (solar and wind power).

"Europe has lost the battle for information and communications technology; it cannot afford to lose the battle for the green revolution."

"Europe must be a world leader in renewable energies and energy efficiency. The construction industry is the principal source of carbon emissions and Europe has a technological and cultural lead in this field. "

Economic decision makers note that the US is increasing its environmental efforts, underscored by a marked increase in R&D expenditure in this sector. Asian competition also is intensifying, particularly in the area of solar energy.

Three main initiatives have been put forward:

• Completing deregulation of the energy sector so that the entire European market benefits from common standards overseen by a European regulatory authority
• Establishing a European public/private institution to coordinate research and development work in the field of renewable energies and the environment. Senior executives differ widely over how this body should be created and implemented. They range from:
  -Setting up a European energy authority, which would be in charge of both the application of common standards and support for innovation
  "The creation of a European energy authority is inevitable in the long term."

-Establishing a broader institution, aimed at encouraging and focusing investment and R&D in alternative energies industries focused on environmental issues.

• Defining common incentives to encourage the best possible expansion of eco-industries and related research centres.

In terms of energy efficiency, particularly in the construction industry (still the main source of CO2 emissions), Europe should promote the development of the most energy-saving housing and offices through a number of approaches:

• Setting objectives and deadlines for Member States for building renovation
• A regulatory approach, with directives reinforcing requirements for new buildings, and recommending the renovation of existing housing and offices
• Subsidies and funding for renovation plans; bringing buildings in Member States into line with energy efficiency standards.

"In terms of energy efficiency and care for the environment, genuine political willpower needs to be exercised: this will not only be effective in economic terms, strengthening our competitiveness in these promising new sectors, but also responsible with respect to future generations."

"Today, there is an ecological imperative; we cannot really afford to wager the future of the planet or that of our children on the basis of guesstimates, given the potential catastrophic environmental scenarios in play. We need to respond by demonstrating exemplary behaviour in this field."

F. Completion of the internal market

A key area of consensus among business leaders interviewed for this report is the need to complete Europe's internal market, by developing more standardized regulations and protected markets and businesses. More than 20 years after the launch of the Single European Act, there still are a large number of regulatory differences between European countries in strategic sectors such as telecommunications, banking, energy and air traffic control.

By completing the internal market, Europe can exploit important sources of productivity, providing European regulators with same prerogatives currently used by national regulators. For many business leaders, the full potential of the European market and its ability to yield optimal mobility requires the "Europeanisation" of norms and standards for important business sectors.

The current financial crisis has resurrected the idea of a single European banking supervisor: while there are differing opinions on the means of implementation, the majority of business leaders strongly favour giving the European Central Bank the power to coordinate national banking supervisors.

On the other hand, since banking is more closely linked to the identity of nations than other areas, several of the executives interviewed favour preserving national supervisors, without ceding regulatory authority to a single European banking institution.

"People call for more financial integration, but the fact that agreement cannot be reached over the issue of how prudential funds are calculated is a measure of the influence exerted by national interests."

G. Coordinated policies for taxation and welfare

Almost 10 years after the successful launch of the euro and the implementation of a single monetary policy, the limited coordination in budgetary policies still hampers European competitiveness. Most of the economic decision makers argue in favour of non-dogmatic management of EU monetary policy. This approach would enable the euro to better support business competitiveness, balancing policies to combat economic recession along with those designed to curb inflation.

"Fiscal harmonisation is a pipe dream: member states are not even capable of keeping to the objectives of the European Stability Pact."

"A minimum of tax harmonisation is required, particularly common rules for mobile capital."

"The European monetary 'snake' of the 1970s should be used as a model for a European fiscal and social snake which would enable harmonisation in the medium term."

"While increased tax harmonisation is desirable, preserving competitiveness between member states is a healthy source of motivation for improvement."

The issue isn't necessarily a question of getting rid of all competition between member states in terms of tax and welfare. But establishing a process to harmonise taxation in the long term, based on the European monetary "snake" model of the 1970s, would probably enable setting a maximum disparity between top and bottom threshold rates within the EU and to gradually reduce these differences.

Such a solution would restrict the possibility of dumping policies on the part of individual member states and strengthen the internal market.

In a similar vein, many business leaders voiced concern about the cumbersome nature of certain member states' employment laws (and the delays in restructuring these). They suggest a gradual streamlining of European employment law based on the best practices already in force in the different member states. Those states serve as a model for combining flexibility, while maintaining adequate social protection for employees.

"Having European legislation governing the employment market is indispensable."

"Europe needs a social and economic model with a greater degree of flexibility to free up the job market."

Several senior managers pointed to the revolution in Spanish employment law over the past 15 years as an example, as well as the Danish model, urging that Europe draw on these successes by member states to promote a far-reaching reform of national social models.

H. Stronger protection of European companies and their intellectual property

The issue of reinforcing the protection of intellectual property was mentioned several times by business leaders in interviews. Many senior executives consider streamlining legislation, jurisprudence, and procedures in member states as fundamental. In particular, European businesses want a guarantee that proceedings and rulings relating to intellectual property disputes can be completed within a reasonable time frame.

"It is very difficult to register patents in Europe and protect them adequately. Jurisprudence and the time taken to hand down rulings are too disparate and complex; the defence of intellectual property needs to be further strengthened by guaranteeing that proceedings can be completed in a short enough time period."

Several of the business leaders expressed the view that non-tariff barriers have now become a major weapon in world competition, used by some nations to deploy their industries. Europe, meanwhile, often remains on the sidelines, displaying little responsiveness and appearing more inclined to force its own industrial players to submit to its regulations.

"There is no point in imposing new environmental norms for Europe unless we are capable of promoting them worldwide."

Several contributors note the absence of European agencies armed with adequate resources for controlling the enforcement of EU standards.

"As things stand, we are powerless in the face of our Chinese competitors; they do not observe any of the European standards, but neither member states nor the European Commission exercise any form of control. We need a European agency responsible for ensuring compliance with European norms."

I. Overhauling the rules governing competition

"There is no problem with competition forming the ideological foundation of Europe. Nevertheless, incorporating competitiveness as a priority objective would be a good thing. "

A number of business leaders described European rules of competition as conservative and dogmatic, impeding the emergence of European champions. For several business leaders, these rules have contributed to intensifying Europe competition, especially when compared with the United States, Japan and now China.

"We need to turn our attention away from inter-European competition given that Asia is where competition is going to be coming from in the future."

In these three countries, interviewees said, national champions often rely on a strong and sometimes oligopolistic position in their domestic market to strengthen their competitiveness in exports.

"The Department of Fair Trade thinks more in national terms than in European terms and acts as a brake to the emergence of European champions."

"The European Commission is founded solely on the ideology of pure and perfect competition, a notion which may tend to damage competitiveness of our companies in whole swathes of our sectors of business."

"European and national regulations are sometimes inconsistent and the definition of market perimeters inadequate, which means that the best medium-sized European companies often end up being bought out by American or Asian companies."

Business leaders interviewed for this report drew a distinction between the United States, where the possible entry of a new competitor is enough to ensure competitive pricing, and the European Commission, which favours the "market share" theory. That theory calls for using the concentration ratio as the principal indicator of whether healthy competition exists or not. As a result, interviewees said, the European Commission develops few policies that support European industrial players.

Some of the senior executives interviewed said that competition regulation policy is one area where Europe has successfully imposed its authority and a form of legitimacy.

"At present, the regulation of competition is the only mission of the EU in the field of the economy which works well; this needs to be preserved."

Ultimately, business leaders believe that expanding competition will accelerate the pace of innovation and improve productivity throughout Europe, helping to level the playing field with countries like the United States and emerging markets.

"It is clear that in some sectors, competition should be encouraged in order to bring down pricing levels which are above what is observed in other nations".

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LIST OF THE PRINCIPAL COMPANIES AND SENIOR MANAGERS INTERVIEWED (IN ALPHABETICAL ORDER)

Aker Solutions: Mr Simen Lieungh
Alstom: Mr Patrick Kron
Belgacom: Mr Didier Bellens
BNP Paribas: Mr Michel Pébereau
AM: Mr Alain Minc
Carrefour: Mr Daniel Amaury de Sèze
Cisco: Mr Thierry Drilhon
CNCE: Mr Patrick Tourdjman
Consolis: Mr Patrick Milliet
Dexia: Mr Pierre Mariani
ERG Group: Mr Alessandro Garrone & M. Edoardo Garrone
Essilor: Mr Xavier Fontanet
France Telecom/Orange: Mrs Stéphane Plassez
General Electric: Mr Francis Bailly
Goldman Sachs: Mr Jean Raby
Groupe BIC: Mr Bruno Bich
Gruppo Coin: Mr Stefano Beraldo
HSBC: Mr Stephen Green
ING: Mr Michel Tilmant
IK Capital Partners: Mr Bjorn Saven
Lafarge: Mr Bertrand Collomb and Mr Olivier Luneau
Lavazza: Mr Giuseppe Lavazza
Mondadori: Mr Alessandro Costa
Materis: Mr Olivier Legrain
Michelin: Mr Patrick Lepercq
Morgan Stanley: Mr Patrick Ponsolle
PSA: Mr Christian Streiff
Rhodia: Mr Jean-Pierre Clamadieu
Sagard: Mr Didier Pineau Valencienne
SAP: Mr Léo Apotheker
Saint Gobain: Mr Jean-Louis Beffa and Mr Pierre-André de Chalendar
Schneider Electric: Mr Henri Lachman and Mr Jean-Pascal Tricoire
SEAT Italy: Mr Majocchi
Siemens France: Mr Philippe Carli
SNCF: Mr Alain Correia
Société Générale: Mr Philippe Citerne
Suez Environnement: Mr Dominique Pin
Unicredit: Mr Alessandro Profumo
Valéo: Mr Thierry Morin
Vallourec: Mr Pierre Verluca
Veolia: Mr Joachim Bitterlich
Vivendi: Mr Jean-Bernard Lévy
Wendel: Mr Jean-Bernard Lafonta

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This project was conducted under the direction of Philippe de Backer, partner and Olivier Marchal, managing director for Europe, the Middle East and Africa for Bain & Company, who are the rapporteurs, with the active contribution of Vincent Rouxel and Antoine Giscard d'Estaing, partners.

Philippe Escaffre, Philippe Charpentier and Francois Kahn oversaw the production of the document, with the participation of Caroline Detalle and Wendy Miller, Paul Judge and Elaine Cummings for the English language version.

Salima Oularbi and Sandrine Lamire looked after logistics coordination for the project with the generous and indispensable help of Danièle Charuau and Candice Lequiller throughout.

Contacts:     

White Paper rapporteurs

Philippe De Backer, Bain & Company: philippe.debacker@bain.com
Olivier Marchal, Bain & Company: olivier.marchal@bain.com

French media relations

Caroline Detalle: Bain & Company, caroline.detalle@bain.com, + 33 1 44 55 75 75
Flore Larger: Image 7, flarger@image7.fr, + 33 1 43 70 74 91

International media relations

Dan Pinkney, Bain & Company: dan.pinkney@bain.com, +1 646 562 8102

About Bain & Company, Inc.
Bain & Company, a leading global business consulting firm, serves clients on issues of strategy, operations, technology, organization and mergers and acquisitions. The firm was founded in 1973 on the principle that Bain consultants must measure their success by their clients' financial results. Bain clients have outperformed the stock market 4 to 1. With 39 offices in 26 countries, Bain has worked with over 3,900 major multinational, private equity and other corporations across every economic sector. For more information visit: www.bain.com.