With the advent of the new euro currency only days away, American investors are hearing numerous "buy" stories on European stocks. The arguments are uniquely arresting: a once-in-history opportunity. Get in on the ground floor.
Investors are told to buy now to secure their place in the biggest economy in the world, backed by what will be the world's leading central bank. That bank has displayed kicks while still enwombed: its 11 parents simultaneously cut rates Dec. 3. Across Euroland, price transparency is coming, so consumers no longer will be faced with wide price disparities, allowing manufacturers and retailers enormous scale.
The kind of corporate restructuring that has driven the U.S. economy and stock market since 1982 will come to Europe. Shareholder value will emerge as the core management concept. Mergers will allow both scale and focus. Already, the European Union's competition watchdogs are buried under a backlog of 1,200 pending mergers.
Should Americans who haven't invested heavily in Europe rush in now, before it is too late to get rich from history's next wave? A few caveats are in order.
The Reagan revolution that slashed millions of jobs in government and big business through downsizing, mergers and plant closings created a powerhouse economy on the model of Austrian economist Joseph Schumpeter. He wrote that capitalism was inherently unstable when it was working effectively, because it grew through creative destruction.
Companies could never count on maintaining market share without continuous innovation and cost-cutting, and employees could never count on job security. People who lost jobs because of businesses' drive for efficiency would eventually find jobs with other organizations. If many, or most, of those jobs offered reduced pay and benefits from what the big organizations had provided, well, that's a price of progress.
What made this Schumpeterian approach work here was a government that promoted progress through laissez-faire policies. Government's growth in nondefense areas was arrested. Antitrust law enforcement moved from leftist paranoia that big was always bad to a pragmatic, case-by-case review of reality in a changing global marketplace. Most importantly, Ronald Reagan's firing of the air traffic controllers shattered the superstructure of restrictive labor policies that had been constraining the economy for decades. Since then, private-sector union membership has reached new lows annually. Start-up companies have been overwhelmingly of the Nasdaq variety, using stock and stock options in lieu of high cash compensation and gaudy fringe benefits packages.
What this economic liberalism has wrought is the loss of millions of jobs in big business and government, while achieving full employment through spectacular growth among smaller businesses and technology-oriented firms.
Can Europe replicate this rush to hairy-chested capitalism? It won't be easy.
BARRIERS TO EURO-UNITY
Language. Members of the European Monetary Union speak 11 languages. That linguistic diversity has been a barrier to grand projects since the Tower of Babel. Canada's inferior economic performance in recent years is due, in part, to the rivalries and uncertainties arising from the need to protect the historic privileges of the two national languages. Last month's Quebec election showed the secessionist Parti Quebecois continues to derive much of its strength from people living in communities where only French is spoken. Those people cannot move to jobs in faster-growing areas of Canada, let alone the United States, so they naturally want to reinforce the privileges that come from being French-speaking. Will unilingual Spaniards be moving to Germany? Will unilingual Italians be moving to Holland? And if they do, will local labor red tape let them compete freely for jobs?
Socialist governments. The European Monetary Union was conceived when most European governments were moderate conservatives. It arrives when all governments are socialists of one hue or another. Labor mobility and free-reign corporate restructuring have the appeal to socialists that high taxes and red tape have for conservatives. Margaret Thatcher is more cordially loathed by many of Europe's new leaders than Saddam Hussein. Should we expect simultaneous Damascene conversions across Europe?
Trade unions. Europe is not only more unionized than America, it is structurally and ideologically committed to protecting the privileges of unions, the bigger the better. German corporations must include union representatives in their supervisory boards. Pattern bargaining across the economy gives entrenched unions the kind of enormous power the Steelworkers, Auto Workers, and Teamsters used to flex in America. To assume that these unions will endorse Schumpeterism is the kind of optimism one would expect only among investors in Internet stocks.
Unemployment. The European Monetary Union arrives with the continental economies bedeviled by double-digit unemployment. The employment gains from massive corporate restructuring come years after the onset of pains from large-scale layoffs. Will governments, unions and voters in Euroland show patience and prescience as hundreds of thousands of highly paid workers go on the dole?
Taxation. Tax-cutting was the second component of the Reagan revolution, and its success in stimulating both the economy and the voters has restrained the Democrats from revenue recidivism.
In Euroland, tax-and-spend policies flourish as if Mr. Reagan and Mrs. Thatcher had never existed. Continental governments spend 45% of gross domestic product, whereas the American government spends 29%.
There is news that Euroland is willing to rethink its tax policies. At a European Union meeting Dec. 1, French and German leaders jointly announced their commitment to tax harmony across Europe. That melodious-sounding phrase produced immediate discord, as Britain's chancellor of the exchequer angrily rejected the concept as a move to force his lower-tax government (and Ireland) to impose the Continent's high taxes on their happy taxpayers. Is this the kind of tax reform that will entice investors into Europe?
Yes, despite these problems, many leading Eurocompanies are publicly espousing shareholder value, and are trying to deliver it. But they preach modernity and productivity in countries whose practices and ethos remain mired in welfare statism.
As if challenging those historic belief-system problems weren't daunting enough, the European Monetary Union comes a year before the onset of the year 2000 computer problem. The staggering computer conversion costs of EMU have constrained European information-technology budgets for Y2K compliance.
The Old World's problems arising from 11 languages becoming one (for computers at least), and the 11 currencies becoming one, soon will be superseded by the problem of dealing with one old language - COBOL - in which the big computer systems are coded.
The current European stock market rallies suggest investors are unworried about these problems. Yet the European rallies lack Wall Street's impressive volume confirmation. Trading activity on the Eurobourses has been strangely modest, raising the possibility these leaps are mere spasmodic twitches, driven primarily by moves to cover short positions. Business confidence, as measured by surveys, has fallen as sharply as stocks have risen.
Indeed, it was this rising pessimism, cited by the European Central Bank's Wim Duisenberg, as the key reason for the coordinated rate cuts. Will 0.3% cheaper money produce a surge in capital investment in Euroland, or are the problems deeper?
On balance, Euroskepticism looks like a sound investing strategy. Europe has 16 centuries of failure in trying to achieve cooperation and a true European identity. While rooting for them to break that melancholy mold, American investors might well decide the current euphoria is premature.
The Continent remains a great destination for tourist dollars, but might not be today's most appealing destination for investment dollars.