Rainer Gut, Chairman, Credit Suisse (Zurich)
EUROSCLEROSIS: FACT OR FICTION?
December 5, 1985
The President, Harry T. Seymour, Chairman
Distinguished guests, members and friends of The Empire Club of Canada: It is my pleasure to welcome as our guest speaker today Rainer Gut, Chairman, Credit Suisse, Zurich, Switzerland.
Since joining Credit Suisse's U.S. investment banking affiliate, Swiss American Corp., in 1971 as Chairman and Chief Executive Officer, Rainer Gut has enjoyed positions of increasing responsibility, including Deputy Member of the Executive Board at the head office of Credit Suisse in 1973; member of the Executive Board in 1975; Speaker of the Executive Board in 1977; President of the Executive Board in 1982; and Chairman of the Board of Directors in 1983.
Credit Suisse was founded in 1856, eight years after Switzerland's first Federal Constitution, a milestone in Switzerland's political and economic development, came into force. With the acceptance of the Constitution, the country's communications system was unified, citizens obtained the freedom to choose their place of residence, and the Swiss franc was adopted as the national currency. The new freedom for trade and commerce paved the way, in the economic field, for private initiative and enterprise.
It was against this background that Credit Suisse was founded, with the particular task of assisting in the financing of transportation and industrial development in Switzerland.
In 1856, difficulties were encountered in talks with foreign banks over the financing of the North-Eastern Railway, establishing a need for an independent bank. It prompted Alfred Escher, a member of an eminent Zurich family, to found Credit Suisse, which opened for business on July 16.
From this modest beginning, the bank has grown and prospered. In the six months ended June 28, 1985, the bank, with total assets of US $34.1 billion: acquired a 29-per-cent (possible 85-per-cent) position in the London brokerage house of Buckmaster & Moore; established a new financial institution in Frankfurt, West Germany; formed a joint trust-banking facility in Japan with Mitsui Trust & Banking Co.; and opened a representative office in Beijing.
Already a partner in the largest issuing merchant bank in the Eurobond market, Credit Swiss First Boston Group, the new West German operation further expands the bank's Eurobusiness by providing it with the ability to directly manage DM-denominated Euro-issues.
Rainer Gut, the architect of this aggressive international expansion, is no stranger to North America. After a brief stint as New York representative for the Union Bank of Switzerland, he joined that legendary investment-banking firm, Lazard Freres, where he rose to be a general partner in 1968.
However, Gut never got used to Andre Meyers' stifling control. After having his fishing trip to the Laurentians interrupted by Meyer for no sensible reason, he made up his mind to leave Lazard. Cary Reich, in his book Financier, The Biography of Andre Meyer, writes:
"From his vantage point atop Credit Suisse, Gut could certainly afford to wax sentimental. But he had no illusions about the life he had left behind. `It's almost like hay fever,' he told a friend. `The moment it's over, you can hardly imagne how bad it was."'
Ladies and gentlemen, it gives me great pleasure to introduce Rainer Gut, Chairman, Credit Suisse, Zurich, Switzerland, who will address us on the topic, "Eurosclerosis: Fact or Fiction?"
Rainer E. Gut
Europe has frequently had a bad reputation. Its name alone derives from a beautiful though somewhat doubtful girl called Europa who, according to Greek mythology, attracted the amourous attentions of mighty Zeus. In subsequent centuries, Europeans have repeatedly been subject to unflattering comparisons with other, supposedly better, nations such as, for example, in the 18th century during the period of the Enlightenment with the just Persian, the wise Chinese or, in general, the noble savage.
But time and again, Europe has successfully refuted such disparaging judgments. Thanks to its missionary zeal, Christianity became a world religion; moreover, our small continent Europeanized the entire world and even dominated it politically until well into the present century.
The collapse of European supremacy after World War II provoked a new wave of European self-criticism. In the mid-1960s, the French publisher and politician J.J. ServanSchreiber summed up the mood when he wrote about the American challenge that Europe could not resist.
But this post-war despondency did not last. The European economic successes in the 1960s, the problem of the U.S. in Vietnam, the weakness of the dollar, the Watergate affair, and the Presidency of the unfortunate Jimmy Carter, gave European self-confidence an enormous shot in the arm; but not for long.
The achievements of the Reagan Presidency caused Europe's arrogance to vanish and that of America to grow correspondingly. The terrible word of Eurosclerosis was invented. Europe, it was claimed, is suffering from hardening of the arteries, and as arteriosclerosis in humans is incurable, the implication was that Europe was doomed. In short, Oswald Spengler's "Fall of the West," we were told, is about to be fulfilled.
But are things really that bad? The rapid change of optimism and pessimism with respect to these major structural issues in recent years is by itself sufficient reason to doubt the correctness of all such sweeping judgments. Moreover, anyone who has followed the ups and downs of Europe's fate through history will be inclined to say that the Old Continent, or what is left of it after the upheavals of the 1940s, can hardly be written off as yet. After similar difficult periods in the past, it has always pulled itself together and resumed the march forward. Whether it will do so again this time is, of course, a question of vital concern.
The present wave of Europessimism which started a few years ago has two main roots. First, the economical, technological and political upsurge of Japan, which has overtaken Europe as an industrial power. Second, the revitalization of the United States, which after a decade of debacles, has, as expected by us, reasserted itself since 1980 as the leading power of the Western world, and not just politically, but above all economically.
By comparison, Europe's recent performance looks lame indeed. Not only economic growth rates were lower than the American ones until recently, but the level of unemployment began to exceed that of the U.S. Politically, too, the reputation of Europe also declined, in spite of British success in the Falklands. Correspondingly bitter became Washington's criticisms, which the rest of the world, but also Europe with its traditional propensity for self-incrimination, has readily accepted.
The charges levelled against Europe revolve around four main points: first, in the political field, the potential Finlandization of Europe and the unfulfilled promises of the European Economic Community; second, Europe's alleged ' technological backwardness; third, rigid economic policies oriented towards preserving outmoded structures; fourth, the high European unemployment.
These issues and problems are admittedly serious, and of major importance for the future of the Western world. There is no denying that the danger of Finlandization exists, but 'what does this amount to? From my vantage point, two facts have to be emphasized. First, I have the greatest admiration and understanding for Finland's policy toward the Soviet Union, which, in its broad concepts, reminds me of the Swiss posture against the European great powers, thanks to which my small country could stay out of major military conflicts and maintain its independence.
Second, Finland is vividly aware of the fact that its independence is closely related to its own and its friends' defense preparedness, which makes any potential attack very costly, thereby acting as a deterrent. Europe appears in its overwhelming majority to be aware of this necessity, even if not yet willing to face all resulting consequences with respect to defense outlays and issues. The old Roman adage, "If you want peace, prepare for war," is in general no longer seriously contested.
For these reasons, it would perhaps be more constructive on the part of the U.S. to constantly admonish its European allies about their military obligations than to use the Washington pulpit to preach the purely negative and, as will be shown, largely untrue gospel of Eurosclerosis.
No doubt, these military issues constitute European key problems. But, fortunately, they are increasingly being recognized by governments of both right and left, as is shown by the policies of President Frangois Mitterrand of France and Prime Minister Margaret Thatcher of Britain.
The same can, unfortunately, not be said as regards the policies of the European Community. True, its great achievement consisted in unifying the western part of the Old Continent to such an extent that the fratricide of European nations, which formed such a bloody trace through history, has been made virtually impossible for the future. But unfortunately the Community shows a tendency of late to promote, instead of market-oriented policies, an atmosphere of agricultural protectionism, a trend that could be reinforced by the recent accession of Greece, Spain, and Portugal.
Accordingly, there is a threat of a new historical paradox that could turn the earlier dream of an economically and politically unified Europe, of a United States of Europe, into the new reality of an international agricultural pressure group, subsidized by the European taxpayer.
Of the danger of these developments, European statesmen are becoming more and more conscious, as indicated by the various initiatives recently taken to speed up the process of integration and to reduce agricultural protectionism. Much will depend upon the success of these steps for the future of the international economy.
The second major charge levelled against Europe, that of technological backwardness, is less serious. True, it is claimed that, in modern fields of technology, notably electronics, information technology, space exploration and genetic engineering, Europe has lagged far behind its American and Japanese competitors. By virtue of their scientific superiority, foreign corporations are penetrating the nerve centres of the European economy; it is said to be in danger of losing its independence. This analysis may appear plausible at first sight. It, however, reflects a number of misconceptions about the relationship between industry and technology.
The United States and Japan certainly have an impressive technological lead in various fields. But is this gap really decisive?
Invention and technological knowledge are not the crucial ingredients of entrepreneurial success, but the ability to translate this knowledge into marketable products is required. An example will show what I mean. In the early '60s, the German Leica camera still was the standard of quality in the field of photography. Despite this, its sales started to fall off, not because it had become obsolete, but for the very opposite reason. Its manufacturer, refusing to bow to the trend towards simple automatic cameras, continued to produce a technological top product, and thus overrefined it to such an extent that it became too sophisticated and expensive for anyone except a small circle of camera cranks. The company's market share shrank and its commercial success declined. Technological excellence alone is, therefore, not enough. Products must be offered and marketed in the form desired by the buyers.
Moreover, a look around department stores, factories and freight depots proves that products based on the highest standards of modern electronics, biophysics, and optics, make up only a small proportion of the goods offered. The broad markets are for ordinary products such as foods, cars, vacuum cleaners, clothing, toys, cosmetics, beverages, and so forth. Producing these commodities as cheaply as possible and offering them in the form the consumer wants is the task of the entrepreneur; that is the vital force that keeps industry alive and competitive.
Viewed from this standpoint, Europe is not doing badly at all. In pharmaceuticals, in machine tools, in foods and telecommunications, it participates in international commerce with shares of 30 to 40 per cent, not to mention banking and insurance. As regards world trade, it has defended its share of 36 per cent at present at least as well as the United States, though somewhat less successfully than Japan. Whereas America runs a huge current-account deficit, Europe chalks up substantial surpluses year after year, which are likely to amount to US $23 billion in 1985 and an estimated almost $40 billion for 1986. All this certainly does not point to any substantial economic or technological backwardness.
The third point made by Europe's critics is the pursuit of backward-looking economic policies. It is true that featherbedding policies on employment and social services were pursued for a longer time in Europe than in overseas industrialized countries. The resulting burdens on the European economy are heavy, and it will take time and effort to remove them.
But it was precisely in the land of the spiritual fathers of the old approach, British economists J.M. Keynes and W.H. Beveridge, that the first breakthrough came. In 1979, the British Thatcher government moved resolutely towards more modern, market-oriented policies. When the United States followed suit in 1980 under the newly elected President Ronald Reagan, all Europe felt the wind of change. Even countries with socialist governments, such as Mitterrand's France and Olof Palme's Sweden, which at first tried to resist the new trend, soon had to bow to the constraints of the market.
Today the basic attitude of European governments towards private enterprise is constructive and friendly. There is now increased respect, and even direct encouragement, for business achievement. The markets have been deregulated, especially in banking and finance, competition in non-agricultural sectors has been encouraged and uncompetitive industries have been drastically slimmed, in many cases through the withdrawal of subsidies. In Britain, France, the Federal Republic of Germany, Belgium and Spain, hundreds of thousands of jobs have been cut in the coal, steel and shipbuilding industries, with the result that Europe now appears to be in better shape in these sectors than the United States. The situation is similar in the textile industry, which has been largely restructured.
Unlike the United States, however, Europe with the exception of Britain, has so far made little progress in easing the burden of taxation. A major obstacle is Europe's high governmental spending, now amounting to 40 per cent or more of GNP. The room for tax cuts is therefore restricted, all the more so as European governments desire to keep public borrowing as low as possible. In fact, budget deficits in Europe, omitting the special case of Italy, amounted to only 3 per cent of GNP in 1984, as against 6 per cent in the United States, while Europe's rate of saving, at almost a fifth of GNP, is substantially higher than America's. The result was that European industry has generally been well provided with relatively cheap finance.
Precisely from this vantage point, the fourth major criticism made in connection with the subject of Eurosclerosis, that of the unsatisfactory state of employment, receives its special feature. The U.S. employment miracle, 16 million new jobs since 1973, has caught the public's imagination. It contrasts starkly with the position in Europe, where, until a short time ago, unemployment was still rising. Europe's jobless rate, which for many decades had been consistently lower than America's, has shot ahead over the last few years.
If these trends are analysed more carefully, it becomes evident that the European unemployment problem has three main causes. The first is connected with demographic factors. Actually, as a result of the baby boom of the 1950s and early 1960s, the total labour force has risen by 24 million persons in Europe since 1970. Not all of these people have found work, although Europe, too, has created millions of new jobs. However, this demographic trend is set to go into reverse at the end of this decade or the beginning of the next, thus automatically causing an improvement in the employment situation.
The second major reason for rising unemployment was, of course, the severe restructuring and redimensioning, to which, as mentioned earlier, several European branches have been subjected in the last ten years or so. The required adjustments have been rendered more difficult by the untilrecent steep climb in European wages and employee benefits, which pushed up the labour cost to a level that made many European corporations, and indeed whole industries, non-competitive.
To this was added, as a third factor in the unemployment picture, the relatively low European interest rates, which promoted the rationalization and automatization of production processes. As a matter of fact, while unemployment rose, labour productivity increased substantially in Europe during the recent past. Under the impact of unemployment, wage rises have meanwhile noticeably decelerated of late. At the same time, the interest in entrepreneurial activities and the formation of new small firms has also risen, while the unions, which help only the employed but are virtually uninterested in the jobless, are losing power and influence. Accordingly, similar conditions start to emerge in Europe as those that laid the foundation of the recent U.S. employment miracle.
Thus, all in all, Eurosclerosis looks more like fiction than fact. Western Europe, like other parts of the world, has to adapt to the changing environment of a world in transition. This process offers the long-term prospect of significant advances in prosperity, but involves at present the pain and sacrifice of adjustment.
It is now being claimed, however, by some quarters, that these difficulties could be circumvented easily and successfully by means of isolationist and protective policies. According to this view, Europe should tackle its unemployment problem, America its inadequate rate of productivity improvement and Japan its excessive reliance on exports, by purely domestic measures without regard to their international implications.
Such recipes were common in the 1930s, when they also amply demonstrated their catastrophic consequences. In today's shrinking world, they are totally pointless. That applies not just to Europe but to the entire free world, whose fate would be sealed if such policies were adopted. Fortunately in Europe, and hopefully elsewhere too, these siren songs find virtually no ear among responsible politicians. The problem of unemployment is, to be sure, morally and politically unacceptable in the long run. But governments seem agreed that it must be solved globally in a marketoriented way.
Europe's efforts in this direction have until recently been seriously impeded by high U.S. interest rates, which have meant that European savings, instead of stimulating investment at home, have largely been lured across the Atlantic to plug the U.S. budget deficit. Conversely, Washington has accused Europe of lacking the courage to adopt expansionary fiscal policies; but, in fact, such an approach was blocked by the inflationary pressures imported into Europe on the back of the strong dollar. These experiences clearly demonstrated the problems and limits of pursuing purely nationalistic economic policies without international co-ordination.
Governments have lately been showing an increased awareness of the requirements of the situation. From our point of view, at any rate, the recent economic policy decisions of the five major Western countries represented an important and happy turning point.
Not only have official interventions helped to restore the dollar to an economically sounder level, thereby reducing if not eliminating the international economic tensions resulting from its overvaluation. Moreover, there now seems to be among the authorities a clear perception of the flanking measures needed.
For the United States this means, basically, a less restrictive monetary policy and increased efforts to reduce the budget deficit, whereas Europe's main surplus country, West Germany, but also Britain and Japan, seem to adopt a somewhat tighter monetary posture coupled with a more expansionary fiscal policy.
The third element in this new-look approach is the Banker Plan, which signals a break with Washington's former handsoff policy towards the international debt problem and stresses America's interest in its lasting and constructive solution, especially with regard to Latin America. Although the details of all these programs are not yet worked out and perhaps will never be worked out formally, there can in my view be no doubt that in recent weeks the world has become a safer place economically. A collapse of production and finance in the Western world appears to be not on the cards at the moment.
Against this international backdrop, Europe looks set to turn in another impressive economic performance in 1986. GNP growth will admittedly lag somewhat behind that of the United States, in contrast to 1985, but at three per cent it will be well above this year's rate. All major European countries except Britain and Sweden can expect to see an acceleration of activity, with unemployment falling slightly and inflation down to 4.2 per cent.
Europe's aggregate current account will remain in the black, thanks mainly to surpluses in Germany, the Netherlands and Switzerland, whose currencies still look like candidates for further appreciation. The main engine of European growth in 1986 will not be exports but private consumption and investment. Geographically, expansion will probably be most pronounced in Germany and France, followed by Spain and the Netherlands.
Looking slightly farther into the future, and disregarding the possibility of international catastrophes, we expect that in 1987 the upturn will start to run up against its real limits, with the economic brakes again having to be applied to fend off inflation. That will probably mean a temporary slowdown, though not an actual recession.
After 1989, the forces of expansion should again come to the fore, supported, among other things, by the growth in world population and a new wave of technology-driven investment, the financing of which will be facilitated by the positive attitudes of European governments towards saving and private enterprise.
Now perhaps you will be wondering what this optimism is based on, and in particular what makes us think that the economic climate is going to remain favourable to the private sector. Are not the socialists barking at the door in Germany, and the Labour party in Britain? Ladies and gentlemen, I am no politician, but I do not believe there is going to be any fundamental political about-turn in Europe.
For one thing, socialist governments have been forced by circumstances in recent years to adopt market-oriented policies. Moreover, the neo-conservative mood among voters is holding up. An exception might be the forthcoming referendum on Spanish membership in NATO, which could result in Spain's withdrawal from the alliance. But the resultant problems, and especially their bearing on another NATO country, Greece, should not be overdramatized. Other deviations to the left are however unlikely.
Hardly anyone now doubts that next March will see the return of a centre-right majority in France. That, of course, could spark off a constitutional crisis, with the President facing in Parliament a majority of opposition, which however could only outvote the left with the support of the extreme right under Le Pen. The consequence might well increase uncertainty in domestic and foreign policy, but the present market-oriented economic approach would hardly be abandoned.
In West Germany, which will vote in 1987, almost all serious political analysts and commentators believe that the socialist party's tactic of vacating the middle ground and flirting with the Greens and the extreme left will lead to serious setbacks at the polls and on the federal level. According to these experts, the present government coalition therefore looks certain to be re-elected, not just next time but probably at the start of the 1990s as well.
There is even less doubt, in view of Britain's electoral system, that the British Conservatives under Mrs. Thatcher will be returned to office, though probably with a sharply reduced majority, in the next general election, due no later than the spring of 1988.
As for the other countries of Europe, elections in Italy have never changed anything, while in the smaller states voters still prefer market freedom to socialist ideology, as was recently confirmed in Belgium and will probably soon be demonstrated again in Austria.
Thus there is little sign of sclerosis either in Europe's economy or among its electorates. The false prophets who prescribed the mistaken remedies of the 1970s are unlikely to be heeded. Our continent is now beginning to master the problems that those treatments caused. Politically and economically, Europe has a future. Comparisons with the present dynamism of the Far East could well prove deceptive.
In my opinion, the West, including North America and Australia as well as Western Europe, remains the most important guarantor of human progress in freedom and prosperity. It is upon us all, ladies and gentlemen, to take up this challenge.
The appreciation of the audience was expressed by Douglas Derry, a distinguished Past President of The Club.