Summary:  As with others in the same position, I am seduced by my quasi-outside status as a frequent visitor to Europe to write down some observations.  In this case, it is about Europe in this economic crisis and the news is this:  Not all that bad.  True, it is the worst economic situation in almost two generations but the special European “system” has demonstrated admirable resilience.  People are losing their jobs and shops are closing but the safety net has held and governments have responded with alacrity (such as it is) without the ideological war cries about socialism that are rampant in the US.  Besides, the espresso remains delicious, as does the panna cotta.

The Details.

Over the last two years I have spent about half that time (off and on) in Europe.  While I did not play the fiddle while all around me was burning, Rome itself was not on fire nor was it being sacked (but then I was not in Rome, so enough of that allusion).  Upon each return to Europe from the economic wreckage and political name-calling and Chicken Little screaming, I was mildly amazed at how well the European economy has managed this terrible crisis.

Weak Dollar, Resilient Companies. True, the weak dollar has severely crimped revenues (and jobs) of many export-based industries—the engine of the EU economy—but companies have responded by seeking other markets or simply riding out the storm.  Most of these companies are small enough and experienced enough that resilience seems to be inherent.

Fast Government Intervention. In addition, the crisis started as a credit crunch.  Without much dithering, the governments responded, usually with nationalization.  That worked.  Few cries of “socialism” were heard because people knew, and accepted, what had to be done.  Moreover, not all of the national economies included banks in serious trouble;  financial regulators in several countries had spotted the looming crisis several years before, forcing banks to suffer lesser pain then so as to avoid fatal illness later.

The Safety Net Held. EU governments invest a lot of money in their forms of social security, unemployment and—get ready—health care.  And they work.  True, public debt is high and getting higher—but, contrary to the claims of monetarists that such debt crowds out (presumably more efficient) private debt, it has not happened.

Don’t get us wrong:  We are neither for nor against public sector spending.  We’re just following the money.  Viewed that way, the safety net expenditures operate as a kind of ongoing stimulus package.  After all, people receiving this money have to spend it somewhere and they do:  on rent, food, even entertainment (today in the phone store I listened to a welfare recipient rant about problems with his government-subsidized mobile phone).  The larger public sector employment also operates as a kind of ongoing stimulus program, in much the same way.  Public employees—notoriously difficult to fire—nonetheless earn (at least some of) their money by making the trains run on time and, like welfare recipients, they spend what they earn from the taxpayers.

The same can be said of the long vacations enjoyed by most Europeans.  Five to six weeks of time off means higher, not lower, expenditures.  True, the money “bleeds” out of, say, Italy to, for example, Switzerland but it is still money spent.  GDP measurements do not differentiate among types of expenditures—just that things are made and spent.  Thus, vacation expenditures contribute to GDP.

Macro Level Productivity. Whatever the ideological knee-jerking that occurs in reference to nationalized companies, a little bit of analysis shows that they fare pretty well by all measurements—ROI, return to shareholders.  The Economist pointed out that most of the largest corporations in the world are in fact government controlled.  Moreover, European employees perform pretty well by most measurements of productivity.  Long vacations, high wages and lots of rich food do not seem to damage their output.

So What?

One can draw many conclusions from these observations (and we haven’t even gotten to the panna cotta).  We think there are many opportunities for US companies in the EU and vice versa (hey, we’re not here just for the espresso and good food).

Part Deux to come . . .

James C. Roberts III (jcrext@globalcaplaw.com) is the Managing Partner of Global Capital Law Group and CEO of the strategic consulting firm, Global Capital Strategic Group.  He heads the international, mergers & acquisitions and transactional practices and the industry practices concentrating on digital, media, mobile and cleantech technologies.  He is currently involved in opening the Milan office for Global Capital.  Mr. Roberts speaks English and French.  He received his JD from the University of Chicago Law School, his MA from Stanford University and his BS from the University of California—Berkeley.

Global Capital (www.globalcaplaw.com) counsels domestic and international clients on legal issues inherent in the deployment of intellectual & financial capital—a merger or acquisition, foreign market expansion, a strategic alliance, a digital content license, a mobile deal, foreign and domestic labor and employment policies, starting a new entity or raising capital. Clients range from global Fortune 100 corporations such as Deutsche Bank and News Corporation and its subsidiaries, MySpace.com and Fox Interactive Media, to start-ups.  Industries represented include digital media, Internet, software, medical and biotechnology, nanotechnology, consulting firms, environmental technology, advertising, museums and other cultural institutions and manufacturing.

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It is possible that some of the structural problems of the European economy (economies) may actually give them something of a buffer for the current difficulties.  Here’s why:

1.  Money under the mattress:  A great deal of money is hidden from tax authorities (legally or illegally), which the Europeans have for centuries saved for a rainy day.  Financial hurricanes count as rainy days.  The mattress is metaphorical in that much of it resides with private banks.  Although they have taken their portfolio licks, they are also sources for capital for doing some interesting deals in acquiring companies, e.g., here in Italy.

2.  No small business lending:  Small business lending, as it is known in the US, essentially does not exist.  This is a bad thing for innovation and economic growth but in downturns a good thing:  less indebtedness.

The third reason is not so much a structural flaw as a difference:  People have (near) universal health insurance.  Whether or not you (or I) like it is not the point.  The point is that people are not going bankrupt because of uninsured medical conditions–and they are going to the doctors.

Food for thought.

European economy

December 2008

If street traffic in Milan’s fashion district is any indication, the meltdown is reaching Via Montenapoleone. Even the Russians–ever reliable buyers–seem to have moved elsewhere. Of course, it has not helped that we have three weeks of rain. On the other side of my world, I heard that Malibu got snow.