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U.S.: Corporate Scandals Take Luster Off American Business Model

  • Jeffrey Donovan

The recent U.S. corporate scandals have breathed new life into the debate in Europe between those who favor the American economic model of unhindered free-market capitalism and those who would like to hold onto the Old World's welfare-state ways.

Washington, 1 July 2002 (RFE/RL) -- Once upon a time, the American economy could do no wrong.

For seven straight years during the 1990s, the U.S. enjoyed its largest peacetime economic expansion in history. Thousands of Americans reaped the windfall of the high-tech "new economy" as Wall Street went into a frenzy over a seemingly endless wave of new Internet firms that hit the stock market promising cutting-edge innovation -- and big profits.

America's success was stunning when seen from the stagnant economies of its rivals -- Japan and Western Europe. While America was prospering beyond its wildest dreams, Japan and Europe were stuck in the doldrums throughout the 1990s -- hostage, according to U.S. critics, to their own stubborn unwillingness to embrace the hard facts of American success: labor flexibility, an easy regulatory environment, low taxes, and big incentives for managers to make profits.

Nervous European leaders wondered how they could copy the "American model," and embarked in the 1990s upon an elusive "Third Way" that attempted to meet the fiscally rigorous demands of global capitalism without abandoning all European "social values."

But faced with very different traditions -- stronger labor unions, expensive welfare states -- many Europeans despaired of ever catching up to the U.S. Growth stagnated and job production remained elusive, despite free-market reforms that continue to change the face of Europe's economy. As a Paris journal remarked in 1998, at the dizzying peak of the U.S. boom: "When will France ever produce a Bill Gates?"

The answer for Europe, it seemed, was never.

But a recent wave of U.S. corporate scandals is suddenly threatening to undermine the very global credibility that props up the U.S. stock market, the world's leading bourse. It's also adding fuel to the debate in Europe over how far to take economic liberalization and painful, American-style reforms seen by some as necessary to better compete in the global economy.

Carlo Santoro is head of communications for the Italian-American Chamber of Commerce in New York. Recalling the massive street protests earlier this year in Italy that scuttled a plan by popular Prime Minister Silvio Berlusconi to liberalize the country's inflexible labor market, Santoro put it this way: "If before the country [Italy] was polarized as far as their opinion of whether to adopt, as they call it, the Anglo-Saxon way of governance in business, or the more European mixed socialist-type, this has definitely polarized the country even more and the continent as a whole."

The first blow struck corporate America earlier this year with the collapse of leading energy-trader Enron, which hid billions of dollars in losses through false accounting that destroyed the pension savings of thousands of employees. The latest bad news came last week when telecom giant WorldCom announced it had disguised as profits almost $4 billion in operating expenses. Then, on 28 June, Xerox said it had overstated its profits by $2 billion, as analysts began to wonder how much of corporate America was corrupt.

The "cooked books" of Enron and WorldCom were done by accounting giant Arthur Andersen, which was found guilty of obstructing justice in the Enron case and which is now being investigated for its role in WorldCom's troubles.

The "Financial Times" of London, the paper of international investors, lamented last week in an editorial, "The WorldCom accounting scandal is an arrow at the heart of the world's financial market assumptions -- that the United States was the paragon of the world's financial markets, with the most dynamic economy, the most innovative companies, and the highest accounting standards."

U.S. President George W. Bush, wary about the domestic political costs of the scandals and their impact on America's economy, promised to crack down hard on corporate crooks. At a G-8 meeting in Canada last Friday, Bush said: "Corporate America has got to understand, there's a higher calling than trying to fudge the numbers, trying to slip a billion here or a billion there and maybe hope nobody notices. But you have a responsibility in this country to always be above board. We expect high standards in our schools. We expect high standards in corporate America, as well, and I intend to enforce the law to make sure there are high standards."

But many Europeans feel they have higher standards already, and look set to try to make that point even louder in light of Wall Street's recent misfortunes.

European opposition to fully adopting the American model runs from the managers of private and public companies, who by tradition are more conservative and cautious in their business dealings, to environmentalists and socialists who want to maintain state regulation and ownership, where possible, of major corporations.

Rolf Elgeti, a European equities strategist at German bank Commerzbank, speaking in London last week, made this observation about the U.S. scandals: "Theoretically, these things can happen anywhere, anytime, but we have to bear in mind that the accounting systems you have in Europe are very different from the U.S. accounting system. I personally think that this is much more unlikely in Europe that any company could do this kind of thing that WorldCom or Enron have done, because the European accounting, particularly on the European continent, is much stricter, and the principle of caution is more conservative."

But is caution better? Willard Berry doesn't think so. The president of Washington's European-American Business Council, Berry says that the U.S. scandals don't call into question the American accounting system, but rather the practices of certain accountants in an economic environment that had grown irrationally exuberant.

But exuberance can be good, Berry says. It's something European markets haven't experienced for years and which is rare, according to Berry, in systems averse to taking risks. And taking risks is the key to the American system: "Clearly, one of the things about the U.S. system is that not only is it competitive, but it is not risk-averse. And so I think people do take risks here, which they don't take in Europe, for the most part. And I think when you take risks, that can also mean incredibly good performance, and that also mean that you could get in trouble. (Laughs)"

Berry believes that the European Union, through privatizations and opening up markets such as telecommunications, is committed to adopting even more reforms to free up the economy and make it more like America's.

But Berry also acknowledges that many in Europe, including those in business, are reluctant to change. He says some key European firms, such as Volkswagen, have opposed efforts from Brussels to make it easier for firms to buy companies in "hostile" takeovers.

Berry agrees with Santoro that the U.S. scandals, which are drying up the flow of much-needed foreign investment to Wall Street, are hardening the debate on economic reform in Europe. But in the end, he believes Europe is committed to change, for its own sake: "The point is, to be globally competitive, I think you do have to go in that [American] direction, and you do have to report quarterly results. You do want to have incentives to motivate management. You want to allow for competition and acquisitions and mergers. You do have to get rid of units that are inefficient and lose money."

But Santoro says Europeans, at least some of them, are reluctant to embrace such changes. And he says the latest scandals only help their argument: "It's strengthening their position to say: 'See, we told you. When it's unchecked, the government should have a regulatory role in business. The privatizations, we should slow them down. We shouldn't be looking to put everything up on the free market. We should leave some things under government control to avoid this kind of a situation.'"

To be sure, Berry says the American business model is far from flawless. He says that Europe, despite loss-making airlines, should tread carefully in liberalizing its transportation market. He says the financial woes of U.S. state-funded railway operator Amtrak, which operates a key transportation link on the East Coast but has been on the verge of shutting down because the government is "tired" of bankrolling it, are illustrative.

Santoro, meanwhile, says "reasonable" Europeans realize their welfare states must be overhauled. It's just that they'd rather only do it halfway. They'd like to find a happy medium between "unbridled" American capitalism and mixed economies. "But it's hard to find a place like that," Santoro says, "If you can, I'll move there tomorrow."

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