That’s just the first step. Siemens is effectively redesigning itself around the ‘Net. The company’s new nerve center will handle everything from buying parts to sharing information among the 450,000 Siemens employees. Located at the Munich airport, with branches in Atlanta and Singapore, the center has 50 staffers and is actively recruiting more. CEO Heinrich von Pierer expects the center to cost 1 billion Euro, and to save the company 1.6 billion Euro in expenses during the first year alone, much more after that.
When it comes to the New Economy, count Siemens as a convert. Now the Old World is full of true believers, all racing to catch up with America. Scholars and businessmen line up at seminars across the continent, seeking to unearth the secrets of the tech-driven productivity boom that has pushed the American economy to new heights in the last five years. From London to Madrid, governments are rethinking everything from laws to schools with the dream of a New Economy in mind. Leading Europeans–starting with central bank president Wim Duisenberg–eagerly watch for the new era to arrive. “I’m rather optimistic,” says Philippe Maystadt, president of the European Investment Bank. “Europe as a whole is lagging behind the U.S., but there are areas where we have been catching up rapidly.”
Technically, there is no New Economy in Europe, at least not in the American sense. European productivity has risen about half a percentage point during the 1990s, only one third the rate of increase in the United States. Compare the United States to other industrial powers by almost any measure of the tech-driven New Economy–number of PCs, Internet hook-ups, high-tech entrepreneurs, start-ups or venture capitalists–and you find Europe and Japan lagging way behind (chart). Europeans now gather regularly to worry over this state of affairs at newly established foundations like the International Institute of Infonomics in the Netherlands and conferences like one on “e-uropean e-conomic growth” in Luxembourg last week.
Why is Europe lagging? Breakthrough technologies often take decades to speed up economic growth. It’s known as the “David delay,” after Oxford economist Paul David, who argues that companies often go through a disruptive transition as they adopt new technology, hiding the fact that they are getting more efficient. Since the IT boom originated in Silicon Valley, and only recently took hold across the States, it’s natural it would take even longer to reach across the Atlantic. “Europe will see a similar transition,” predicts David. “We’ll see a surge in productivity four to five years out.”
Many Europeans are intrigued by the idea that the American miracle is in part a mirage. One reason the New Economy has been called “invisible” is that old accounting methods have trouble monitoring it. Since 1995 the United States has assumed that IT productivity rises in lockstep with computing power. So if a $1,000 computer doubles in speed from one year to the next, U.S. accountants “deflate” the value of the computer to $500–a price cut (or equivalent productivity gain) of 50 percent. If European countries corrected (some would say doctored) their accounts this way, they would get a huge productivity boost. America’s lead in IT investment would fall from 8 to 1 down to just 2 to 1, says economist Patrick Vanhoudt of the European Investment Bank. “Europe is clearly at a disadvantage.” says Vanhoudt.
But no one believes math tricks alone will close the gap. Just four years ago, stock markets in Germany, France and Italy set up new exchanges for small, fast-growing companies. Money started flowing in to fund good ideas that could never get a hearing from stodgy Old Economy banks. As global competition heated up, fearful authorities started slashing corporate taxes and streamlining the red tape that tangled up new companies. Such changes revolutionized Europe. For Americans, the ‘Net was often just one more way to make a buck, says Birger Priddat, a German economist at the University of Witten. In Europe, “the New Economy means a new mentality. It’s creating a generation of entrepreneurs.”
Europe is catching up. Much of the U.S. productivity boom has come from advances in Silicon Valley’s signature product, the silicon chip. A decade ago, Europe had no semiconductor manufacturers in the global top 10. Now it has three: Philips of the Netherlands, Infineon of Germany and ST Microelectronics of Switzerland. George Scalise, president of the Semiconductor Industry Association in Washington, says, “It may be true that 10 years ago the Europeans were nowhere, but they’re now genuine contenders.”
The next step is putting the chip to work. The United States outspent Europe on information technology by about 2 to 1 for much of the 1990s, but that gap is expected to close. A recent Merrill Lynch survey of business managers found that the Europeans plan to raise spending on information technology 13 percent this year, nearly three times faster than Americans. The head of the new Infonomics institute, Luc Soete, even argues that “there are various versions of a New Economy emerging,” with Europeans betting far more heavily on wireless technology than the Americans are.
The recent dot-bomb debacle has not put a damper on big European companies’ investment in e-business ventures–a sharp contrast to the traumatized caution on the other side of the Atlantic. After a painful reality check, even the start-up scene is reviving. At Republic Alley, the incubator for start-ups synonymous with France’s internet revolution, founders Laurent Edel and Charles Madeline have simply dumped a few failing clients and focused on getting on with their e-lives. They are now investing anew, and have renovated their Paris warehouse space to give it a more professional look: a few more suits, a reception desk with a buzzer. These days they’re aiming to pick up one good company a month. “We were a little nervous there for awhile,” says Edel. “But we’ve come out of it OK.”
Swedish dot-bomb survivor Anders Ullstrand is doing better than OK. Last November he and two other Swedish 27-year-olds launched Radical Park, a consultancy offering what he calls emergency-room service for venture-capital victims of the crash. The trouble was that the Internet upstarts neglected the fundamentals, he says: “For the last two years, we all forgot that business has had the same ingredients since the 17th century.” Ullstrand helps his clients get back to the basics, cutting costs, focusing on profits and tapping the screens of their Palm Pilots to find partners or merger candidates throughout Europe.
The main thing is not to give up now. Oxford economist David predicts that European companies may ultimately wring more productivity gains from microprocessor technology than Americans have. European companies are already sewing chips into worker uniforms to track them through the laundry, and French waiters use wireless to zap orders to the kitchen and collect payment at the table. He also sees a huge boom in telecommuting, which could cut the costs of maintaining roads, building offices and fighting pollution, all of which are more expensive in Europe than in the United States.
European heads of state gathered at a “dot-com summit” in Lisbon last March and vowed to surpass the United States as the world’s most dynamic region. They pledged to pass new laws to help companies take advantage of information technology. Since then, they have made electronic signatures valid for e-commerce, and freed Internet service providers in any country to operate throughout Europe. It was only a start, warns Maystadt. “Some European governments prefer to see technology as an easy and politically convenient way to rejuvenate the economy, but there won’t be a New Economy without a flexible economy.”
That means some difficult adjustments. The old Europe’s chronic problems won’t be solved by market forces alone. To keep prosperity growing, the continent’s lawmakers will have to tackle the rigid labor market rules that make it so hard for companies to hire and fire employees–and that often keep ambitious workers from developing and applying new skills on the job. Europe will also have to put more money where its brains are. Government support for R&D as a fraction of GDP is still straggling far behind the United States. And there has to be a major investment in education; it’s the only way to build the kind of labor force to meet the constantly mutating job descriptions of a knowledge-based economy. The changes may not be cheap or easy. But they have already begun. And soon the Americans may be studying how Europe does it.
