Here are a few of observations from a week of meeting with clients and government officials:

1) France and Germany Leading the Show—Mrs. Merkel and Mr. Sarkozy are taking the lead on resolving the key issues facing the EU, and are asking—even demanding--that other member states fall into line. This is not the usual consensual EU style, but there is a crisis and decisions must be made quickly. The member states most unhappy are the new ones from Eastern Europe who freed themselves from the Soviet Union and now expect some say and measure of autonomy, exemplified by Slovakia’s rejection of expanding the euro zone's rescue fund, earlier this week. Despite the challenges for even these two countries to reach a common view on Eurozone problems, one potential positive to the current crisis is that it may be reinvigorating the Franco-German engine pushing the EU forward. That said, Merkel finds herself in a political fix at home; Sarkozy has an impending election and is behind in the polls; both – like many politicians in the region - are waiting to see who else blinks and then who blinks first.

2) Fury Against Banking Sector—The suggestion that banks may respond to need for higher capital ratios by selling off assets, thereby shrinking balance sheets and diminishing lending, is causing outrage. Attached is a copy of the headline from Die Zeit, the leading German newspaper, calling for restraint of the banks with a visual of a rope around a bank skyscraper. Banks are loudly protesting the likely revaluation of the Greek debt because bondholders’ losses are likely to double from the present 21% to something like 40%.

3) Decline in Trust in Government—Leaders in France, Germany and the UK are all losing popularity. The same goes for Spain and Italy, where Mr. Berlusconi barely survived a vote of confidence last week in Rome. The Economist even ran a recent headline that said ‘The man who screwed an entire country.’ Government institutions are national but the markets are demanding a more unified solution. One expert said that the EU was created in the 50s for a much smaller number of nations in a much less connected world. A business executive commented that the political risk in developed countries is now as high as in developing nations, citing German’s decision to stop nuclear energy by 2020 as an example of unpredictability. The deep irony may be that greater political EU integration may be the only way to stave off monetary collapse.

4) Attitude toward USA—There is amazement here about the unpopularity of President Obama in his own country. For example, Obama gets 71% approval rating in the UK. There is great interest in the Occupy Wall Street movement, in particular whether this is truly a populist movement in the making (I think not). Given America’s own economic travails, the EU recognized that they need solve the crisis themselves (USA will participate only as an IMF member in financial super fund). The Europeans see America as more similar to them than in any time since WWII, given high unemployment and constrained budgets. The joint campaign in Libya is seen as a perfect example of European American cooperation.

5) Companies Playing Hardball—The CEO of Fiat has informed the unions in his home country, Italy, that unless they agree to wages at the level of Eastern Europe workers, he will relocate his production. Mr. Marchionne recognizes that there is excess car manufacturing capacity in the Continent and that it is survival of the fittest. Business leaders in the UK are openly complaining about excessive personal taxation levels leading to a flight of talent and a brain drain.

6) Gap Between Rich and Poor—Restaurants are jammed in Paris and London. Shops seem to be busy. But as in the USA, go outside of the capitals and you will see a different picture. When I was in the UK, the inflation rate was 5% and TV coverage was mostly about families having to choose between paying rent or utilities or feeding the family. In Spain, youth unemployment stands at almost 50%, with little prospect of a ‘quick fix.’ How long before they lose patience with their elder and usually wealthier citizens?

7) Sustainable Consumption—Despite the economic challenges, executives seem to be convinced that their companies must continue to advance sustainability practices, though many are still to reconcile what ‘sustainable growth’ truly looks like. There seems to be less concern about reducing demand as prices rise to compensate for higher costs of production. In fact, the solution in Europe seems to be smaller sizes (I eat a lot more bread at meals here as portions are smaller than in USA).

We are witnessing a battle for Europe’s soul. Is it a region of nations or is it moving towards greater integration and becoming being a quasi nation-state with federal powers? Is the solution the hard-edged reduction of government spending carried out in Ireland and the UK (where not everyone is so convinced by Chancellor Osborne’s medicine) or the muddle through philosophy of the Mediterranean states? Or could the Scandinavian model balancing entrepreneurialism and state support in so-called ‘flexicurity’ prove itself the better template? Will Germany be willing, as the economic superpower most benefitting from the Euro as a giant exporter, be willing to shoulder as much as half of the $1 trillion total cost of the bail-out of Greece, bank refinancing and super fund for future crises?

I feel like a witness to history; let’s hope that sanity prevails and the package comes together over the next few days. The officials seemly oddly calm that it will, even if their political masters’ leadership skills are being tested to the limit.

Posted by Edelman at 8:17 AM |

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October 13, 2011

Two Tall Trees

Two of the giants of the Chicago business community passed away in the last week. Bob Galvin and Art Nielsen were the CEOs of Motorola and A.C. Nielsen. But they were much more to a young man looking for role models. Both were close friends of my parents, supporters of Senator Charles Percy, members of Young Presidents Organization and major contributors to the non-profit sector. They had so much in common: