Doing business in Europe
By Tony Brown (executive vice-president) Chelgate Limited.

Opportunities and dangers for American companies

Background
Every week, US companies learn, to their peril, about the growing power of European regulators. When EU Commissioners shot down the proposed merger of GE and Honeywell in summer 2001, Jack Welch — GE’s chairman and chief executive — said of his dealings with European Union (EU) regulators: “It’s clear that I underestimated the challenge.”

Welch’s statement is an ominous wake-up call to all American businesses about the potential difficulties of doing business in the fifteen western european countries that make up the EU.

US companies doing business in Europe are now facing more important and far reaching changes in regulatory and legislative environments than at any time since the end of the Second World War. To make the situation worse, EU regulations are often much stricter, and more difficult to understand, anticipate and adapt to than those in the US. For many this creates real business risks; for some it offers opportunities. What is vital is an informed understanding of what is happening, and likely to happen, coupled with the ability to anticipate and take necessary steps.

The opportunities
While stricter regulatory standards do pose increasing dangers, American businesses are poised to benefit from several developments in the European Union. Beginning in 1998, the airline, telecommunications, natural gas and postal service sectors were deregulated. Opportunities also exist in automotive, environment, franchising, medical and pharmaceutical, and travel and tourism sectors.

In the public sector, there are sizeable opportunities for US firms to participate in partnerships, concessions, and/or investments in major infrastructure projects in the EU. An EU directive in this area requires open, objective bidding procedures, a benefit for US firms.

Private, sector-specific opportunities abound. For example, new EU environmental, waste management and recycling policies are now creating wide-ranging opportunities for US firms. In the same way, the EU move to increase competition in the telecom sector has opened telephone markets across Europe, providing tremendous opportunities for US companies. The list is extensive, and every day important new opportunities arise for US companies in the EU, driven by the weight and pace of regulatory change.

Working to deregulate
EU Commissioner for Enterprise Erkki Liikanen has made cutting regulation and strengthening the EU regulatory cost benefit analysis system major priorities. British Prime Minister Tony Blair, aware of the challenges EU regulations pose to business, has set up a Regulatory Impact Unit whose aim is to improve the way Europe makes rules.

At a Union of Industrial and Employers' Confederations of Europe (UNICE) conference in May 2001, a panel of European Parliamentarians (MEPs) and others said it was clear the legislative process needs to be simplified and speeded up, otherwise yesterday's rules will be applied to tomorrow's problems. They called for more imagination in involving business in the regulatory process, better using the expertise of business in the preparation of regulation. Paul Rubig, a Member of the European Parliament’s Industry & Energy Committee, called on business people themselves to do the speeding up: “The [European] Parliament has some 1,000 initiatives from the Commission each session. We need you to tell us where we should focus our attention.” For US businesses in Europe, the message could not be clearer: EU lawmakers want business to help them make the EU regulatory process more business-friendly. It is now up to US business to get more involved.

For companies that are prepared to participate in the debate surrounding EU regulatory reforms, and that understand how to engage with the relevant EU lawmakers and regulators, there is obviously the possibility of contributing to the eventual outcome. These types of initiatives are commonplace in every industry sector, so whatever your business, there is almost certainly an opportunity to contribute to the thinking behind the regulatory process.

The importance of the EU marketplace to US business
How important is the EU to US business? The answer is clear. American business has an enormous stake in the trading relationship between the US and the EU. Investment and trade between the US and the EU has expanded exponentially since Europe first began to integrate its market in the 1950s. The US and the EU together account for almost 40 percent of world trade and 57 percent of the world’s gross national product.

The annual flow of goods, services, and foreign direct investment between the US and the EU now exceeds one trillion dollars. The EU is the largest trading partner of the US. One fifth of total US merchandise exports, and one third of total US service exports go to the EU. Indeed, the EU-US trade relationship directly supports a total of more than seven million jobs in the US and the EU countries.

How does the EU work?
To fully comprehend the challenge, US companies must understand that, since 1974, as a result of a series of treaties agreed by the countries currently comprising the European Union, the EU has won wide and growing powers to regulate business. In every area of economic activity, the EU has used these new powers to push through a determined 'harmonisation' programme in an effort to unify marketplace standards throughout Europe. Harmonisation has made selling to all 350 million western Europeans easier, as opposed to selling to each individual country within the EU. On the other hand, since 1990 alone, this has resulted in over 3,500 new EU 'directives' each year, and a mass of regulations that are binding upon any company doing business within the EU. As a result, a more uniform, but heavily regulated Europe has emerged.

At the center of this regulatory structure created by the treaties is the European Commission, which is responsible for initiating policy proposals and seeing them enacted. A European Parliament and a Council of Ministers complement the policy process. When policy proposals are made at the Commission, business is at a decided disadvantage if it is not, and has not already been, working with EU policy-makers. When proposals pass from the Commission to the Parliament and the Council of Ministers, it is imperative for concerned interests to work with policy-makers in all EU lawmaking bodies, in member state governments, and among opinion-formers who influence these decision-makers.

The challenges
For US business operating in Europe, the risks and challenges lie in two principal areas: first, in the many new demands and conditions created by changes in the regulations governing all business, and secondly in specific regulation or legislation which may dramatically re-orient an entire industry, effectively excluding certain products and closing markets to them.

This tide of regulation shows no sign of being reversed and the regulatory challenges to business are growing. Ruth Lea, the policy chief for the London-based Institute of Directors (IoD), one of Britain's most influential business advocacy organizations said: "We're in despair. We're seeing re-regulation of the UK labour market, undoing all the gains of the last 20 years." Dirk Hudig, former Secretary General of UNICE is gloomy about the prospects for significant reform. "The burden on business (in the EU) is growing year on year; it's an unstoppable trend at the moment. The most dangerous thing is that it's cumulative." Among the red tape coming from Brussels are directives telling employees how to climb ladders, and a "vibrations directive" restricting the number of hours a farmer may sit on a tractor. Another recent EU directive on workplace discrimination shifts the burden to employers to prove their innocence if brought to court. The list of similar regulations is extensive.

The shift of power from member states to Brussels was given important new impetus in the recent Nice Treaty, where the agreement on Qualified Majority Voting (QMV) meant that over a wide raft of issues the wishes of individual member states could now be overruled by a vote of the majority.

This new policy has added yet another regulatory threat to business. A recent example of QMV's effect on business was Tony Blair's unsuccessful effort to protect British business by blocking a new EU directive requiring firms with more than 50 employees to consult their workforce before making major management decisions.

While some would point out that the actual number of new pieces of EU legislation has fallen since 1990, the breadth and depth of regulations being imposed is much greater. Indeed, if the last two decades are any indication, in the next 10-20 years, as the EU looks to expand to include 12 new member states in Eastern Europe, the European regulatory environment seems certain to become more difficult for business.

Protecting your business in Europe
Peter Knowles, head of small and commercial markets at UK insurer Norwich Union, says: "If worrying about what's happening in the EU isn't a priority and businesses don't keep on top of these changes they could be breaking the law and putting their business and staff at risk."

Protecting your business in the highly complex world of EU lawmaking involves proactive, creative and informed action. Pressure points where decision-making may be identified or influenced are numerous - but every possible angle must be considered. Knowing, for example, when Commission staff are in the early stages of drafting a proposed 'directive' and acting upon it can have a substantial effect upon the health of your business.

For American businesses, the challenges can be even more difficult. Not only is Europe's commercial environment becoming increasingly alien to the market climate they are used to at home, but there are wide cultural differences between Europeans and Americans about what role government ought to play in the marketplace -- what Ambassador Guenther Burghardt, the European Commission's senior diplomat in Washington refers to as "sharply different societal values and sensitivities".

And Britain itself, America's traditional market and cultural partner, is slowly moving towards a more European cultural and political posture. This change is exemplified by Britain's acceptance of the European Union's Social Chapter, one component of the 1992 Maastricht Treaty, which strengthened the EU's power over workplace rights.

Importantly, American business must not be lulled into complacency by US and EU efforts to negotiate over some of the thornier issues of trade relations. From banana imports to US tax policy, from internet data privacy to EU subsidies of Airbus and much more, the US and the EU do work, through a variety of means, to negotiate differences over trade issues. However, beyond the headline-grabbing trade disputes, American businesses face more risks in the everyday European domestic regulatory environment itself -- as a result of the breadth of new regulations that continuously flow from the EU bureaucracy.

For Americans, the EU is unlike any lawmaking body they are familiar with at home. A mixture of different political governance philosophies, and with a strong bureaucracy supporting the democratic voice of members of the European Parliament and national governments, but without the check upon centralization provided by the US Supreme Court -- the EU regulatory bureaucracy is unique and powerful, and often the first and last word on any regulatory matters in Western Europe. American businesses are also often less well connected to decision-makers in Europe. The result is that they face a greater risk of failing to identify or anticipate vital changes in the European regulatory environment. And for any business reluctant or slow to adapt, the situation can be even more serious. The very foundations upon which they have built their business can be torn away.

Many would point to Europe's move towards a more heavily regulated environment as having promoted progress in human rights, consumer protection and fair trade, as well as the advantages American companies gain from having consistent regulations all over Europe. But it has also created significant challenges for business: challenges which will increase in scope and complexity in the future.

How Chelgate can help
Chelgate assists American businesses in identifying and assessing the challenges they face in Europe, and creates specially tailored plans of action to help avoid risk and maximize opportunity in the EU regulatory environment. Chelgate is not a law firm, but rather a public affairs consultancy providing tailored political intelligence and solutions that often complement the work of lawyers. Our role is to provide solutions that protect and increase our clients' profit margins, allowing them to achieve successes within Europe they would not have achieved otherwise. Our team of specialists can put this expertise to work for you.

If your business is presently operating in Europe, or if you are considering expanding operations into Europe, please contact:

Nicholas Wood-Dow
Executive Vice-President, Chelgate Ltd

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