Revitalising the European Dream: A Corporate View – 2012 Edition
Per-Ola Karlsson
Based on a large scale survey of executives, the paper describes the corporate view towards the European Union. Although worried, business executives still believe in the EU. They feel the solution to current issues lies in transferring more power to EU authorities, especially when it comes to monetary, budgetary and fiscal issues. The EU should focus on austerity and discipline states that do not manage to balance their budgets, however, austerity measures should always be coupled with a convincing growth strategy. More than 30% of the participating executives advocate a smaller Eurozone: deeper integration within a core group is seen as a pragmatic solution to the current issues. In the field of innovation, respondents feel there is still plenty of human capital to tap: we can be much more ambitious. In the social sphere, the EU should not add additional regulation, but harmonization of standards should be a goal.

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Revitalising the European Dream: A Corporate View 2012 Edition

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The State of the European Union 2012 Edition – Revitalising the European Dream: A Corporate View

Foreword: Giving a Voice to Business
The ongoing financial crisis is not just limiting growth, it also reveals gaps in the European Union’s decision making procedures. One fundamental challenge is to use the crisis as a window of opportunity to carry through structural reforms that will restore European competitiveness beyond pre-crisis levels. Europe has remarkable assets in terms of wealth, creativity and human capital. In this report we give a voice to the business community, as it is instrumental in fully leveraging these assets and in bringing new growth to Europe.
The long-standing debt crisis that has overwhelmed many of the EU countries has come to a head over the past year. Both the EU and its national politicians are seen as ineffective and indecisive in resolving the ongoing financial crisis. Even more worrisome, cracks have begun to appear in the EU’s decision-making processes and show that national interests still dominate the efforts to resolve several critical issues. This dynamic has seriously tested both the solidarity within the Union and the EU’s credibility on the world stage. It also has strengthened the notion that Europe is on the wane, being passed left and right by more agile competitors such as China, India, and the “Next 11”.1 Yet commentators often fail to point out that the EU’s current crisis is really the unfortunate other side of the coin of one of the Eurozone’s great benefits. The common currency allowed many of the region’s weaker economies to borrow at highly favourable interest rates, which in turn has fuelled a great deal of economic growth throughout the EU. It was the credit crisis in the U.S. that shattered this mechanism, revealing a significant part of the arrangement to be a bubble of its own. The resulting enormous debt burden and high interest rates are now threatening several of the economically weaker EU countries with default. In the current climate of financial strain, each member state has been fighting a domestic political battle regarding whether or not to adhere to the Maastricht Treaty’s stringent budget requirements.2 Even when governments decided to adhere to the 3% guideline, the structural reforms required for meeting these criteria have frequently clashed with the perceived or actual interests of the electorate. This perception is strengthened as the current austerity agenda often lacks a clear strategy on how to return to growth: austerity alone will not bring the EU the
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self-confidence that is required to flourish again. It is easier for domestic politicians to blame the EU for the austerity and painful reforms required than to take responsibility for making the budget cuts needed to maintain their country’s solvency. The result has been a further weakening of popular support for the European Union itself. Clearly, the EU has structural issues that must be resolved. In this age of uncertainty and turmoil. However, it is vital to take a step back from the current panic. The region remains immensely wealthy, includes some of the world’s most productive and innovative countries, is lauded for its quality of life, and has a very well educated population. The EU is far from perfect, but the ongoing process of political and economic integration offers a path towards a coordinated response to the current financial crisis, and a return to growth. Moreover, the current crisis presents a rare window of opportunity for carrying out long-overdue structural reforms, and even for questioning the EU’s existing political and economic structures. Thus, it is not just the region’s economic recovery and competitiveness that are at stake as we work to resolve this crisis, but also the future shape – and even the continued existence – of the most successful political and economic union the world has ever seen. “This economic crisis is a full scale test of the EU’s strength and cohesion: if institutions can weather this crisis, they will only become more effective and resilient in the future.” – Bruno Strigini President, Europe/Canada Merck & Co., Inc./MSD We believe strongly that in this vital debate the voice of the corporate world should be stronger. Companies and executives are not merely the object of decisions to be taken; they are the ones that should bring recovery to Europe – as well as new prospects and increased growth.

It is critical to understand how the business community, both within the EU and internationally, is reacting to the current crisis in Europe. What are the competitive advantages that will allow Europe to attract new investments, talent, resources, and generate new prospects? What are the key steps that the region must take to respond to its current and future challenges? How can the EU promote the innovation needed to keep the region growing? Finally, what will the EU look like as it emerges from the current crises – and what should it look like? The answers to these questions will be critical in enabling Europe to transcend its current economic situation and shape its future. To that end, Booz & Company, INSEAD, and the European Executive Council (EEC) recently conducted a worldwide survey of 2,000 senior and up-and-coming executives both in and outside Europe. This short report summarizes the results of the survey. It addresses the issues that must underpin any corporate agenda for change in the European Union – economic and social issues, technology and innovation, and the points of view of the younger generation and the BRICS countries (Brazil, Russia, India, China, and South Africa). This report will inform and support discussion and debate on these critical issues at the State of the European Union conference of business, government and other opinion leaders to be held in Brussels on the 31st of May 2012. Per-Ola Karlsson Senior Vice-President & Managing Director, Europe, Booz & Company Bruno Lanvin Director of e-LAB, INSEAD Ludo Van der Heyden Mubadala Professor in Corporate Governance and Strategy Director of the Corporate Governance Initiative, INSEAD Robert Gogel Co-founder, European Executive Council & CEO, Integreon

A term coined by Goldman Sachs economist Jim O’Neill to refer to a group of 11 countries that are likely to rise significantly in economic power: Bangladesh, Egypt, Indonesia, Iran, Mexico, Nigeria, Pakistan, Philippines, South Korea, Turkey, and Vietnam. Government deficits should be less than 3 percent of GDP, and national debt cannot exceed 60 percent of GDP.

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Table of Contents
Foreword Giving a Voice to Business I - The Corporate View on the European Union Key Findings II - Austerity and Responsibility The Economic Challenge III - Flexibility and Harmonization Europe’s Social Structure IV - Acknowledging and Harnessing Our Strengths Technology and Innovation in Europe V - A Call for greater EU Leadership Next Generation and the BRICS Perspective VI - From Attitudes to Actions Questions for Debate Methodology Acknowledgments 2

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6

10

11

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14 15 15

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The State of the European Union 2012 Edition – Revitalising the European Dream: A Corporate View

I - The Corporate View on the European Union: Key Findings
The majority of respondents see the EU as a major power; young respondents and those from the BRICS countries feel even more strongly than Europeans about the EU’s position in the world. Respondents do express concerns, however, about the general situation in the European Union. This concern has deepened in the past year among executives in Southern Europe, whereas executives from the core Eurozone countries (e.g. Germany, Netherlands, Luxembourg) remain optimistic (see Exhibit 1). This section highlights potential ways to alleviate these worries.

Exhibit 1: Across the board, most respondents are worried about Europe; Europeans and Eurozone members remain the most optimistic

What What are are your your overall overall feelings feelings towards towards Europe? Europe? What are your overall feelings towards Europe?

8% 8%

9% 9% 10%10% 9% 9%

9% 9%

3% 3% 17%17%

5% 5% 19%19%

5% 5%

4% 4% 9% 9%

5% 5% 5% 5% 7% 7%

16%16% 31%31% 41%41% 6% 6% 3% 3% 35%35% 32%32% 4% 4% 4% 4% 34%34% 34%34% 34%34% 35%35% 35%35% 16%16%

25%25%

14%14%

20%20% 12%12%

5% 5%

42%42% 62%62% 30%30% 38%38% 37%37%

What are your overall feelings towards Europe? What are your overall feelings towards Europe? overall feelings towards Europe? wards Europe?
9% 10% 20% 20% 3% 10% 9% 3%

Enthusia Enth ConCon den IndiIndi ere Worried Wor Con Concern

9% 3% 9% 5% 5% 9% 17% 4% 16% 5% 35% % 5% 17% Overall Overall 35% 5% 19% 41% 9% 35% 25% 6% 5% 7% 9% 35% 5% 20% 25% 14%16% 7% 12% 20% 6% 4% 5% 4% 2% 3% 4% 5% 4%

4% 5% 5% 5% 21%21% 9% 17%17% 18%18% 5% 9% 4% 5% 5% 15%15% 5% 17% 7% 5% 19% 9% 4% 25% 16% 5% 14% 7% 5% 19% 9% 25% Eurozone Eurozone EU-27 EU-27 Europe Oceania Oceania Africa AfricaNorth North AsiaAsia BRICS BRICSSouth South 14% Europe 7% 12% 20% America America America America 16% 5% 14% 12% 5% Enthusiastic 34% 38% 42% Enthusiastic 30% 37% 62% 37% 38% 62% 42% Enthusiastic 62% 42% Enthusiastic

25%25%

30%30%

31%31% 27%27% 28%28%

30% 34% 34% 34% 37% 38% 30% 62% 32% 42% Enthusiastic 4% 34% 34% 37% 8% 62%

Con dent Indi erent Worried 30% 18% 17%

Con dent Indi erent Worried30% 25% Concerned

27% 31%

Con dent Indi erent Worried Concerned 28%

Con dent Indi erent Worried Concerned
31% 21%

Source: State of the European Union 2012 Survey, n= 1,978

Con dent Indi erent Worried Concerned

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The Corporate View on the European Union

1. Business leaders worldwide believe that Europe can and should be more competitive and collaborative. Increased economic authority should be concentrated in Brussels, even as the Eurozone should possibly become smaller.
Although respondents agree that the EU is currently lacking in competitiveness, they believe that this issue can be addressed by streamlining and reallocating national budgets. Fiscal austerity and balanced budgets remain a top priority. However, austerity alone will not bring recovery and may only decrease confidence and commitment: governments, the ECB and national banks should also have a clear and convincing strategy for growth. Funds in national budgets should be allocated away from entitlements towards innovation and education, two top priorities of our respondents. Finally, increased social flexibility would strongly aid competitiveness. Some countries are on the right track, but too few appear to follow this path. For the European Union, this is a time for transformation, not for expansion. Some respondents even feel that the Eurozone should be shrunk to increase its robustness. However, this should not be seen as a vote of no confidence in Brussels: there is overwhelming support for even deeper integration on monetary, fiscal and budget issues. Business leaders and younger executives have lost confidence in the ability and willingness of many of the region’s national governments to make responsible judgments on monetary and budget matters. They believe that the EU can do a better job in these matters. In addition, the business community is confident that the EU’s single-market initiative is still Europe’s best chance for fostering competitiveness of its member states. ”We need a spirit of confidence that we can get out of this crisis together.” – Barbara Frei Region Manager Mediterranean, ABB Italy Country Manager and CEO of ABB S.p.A.

2. In the social realm, business leaders subscribe to a dual agenda for the EU: to preserve its cultural and social diversity while harmonizing the “rules of the game” throughout the community and furthering the development of a single European market.
The EU is a highly diverse region; each country has its own regional roots, culture, and traditions. Respondents feel strongly that heavy and uniform regulations should not be imposed on this diverse community. Instead, the approach should be twofold: on the one hand, allow for flexibility in social regimes and let countries find their own paths democratically. On the other, drive for harmonization in minimal common standards across EU countries. This, respondents believe, is a necessity for the creation of a single European market and the free flow of people, goods, information and capital, which remains a key priority.

3. Business leaders wish for a more ambitious Europe with a greater focus on innovation and technology.
Respondents applaud Europe for its investments in “hardware”: the EU, they feel, has played a critical and successful role in the domains of information, transportation, and energy infrastructure. However, they do not think that Europe’s leaders are equally ambitious in terms of “humanware” and “software”. In addition, survey respondents believe the EU lacks the culture of innovation and ambition necessary to lead in the field of technology. This has posed a real challenge to Europe’s competitiveness. The region is still without a sufficient number of sustainable business hubs and technology clusters, policies that support small and medium-sized businesses, and a truly vibrant venture capital culture. Business leaders continue to view the EU as a leader in groundbreaking innovation and fundamental research; where Europe lags, in their opinion, is in the commercialization of new ideas into full-blown industries, driven by the combined efforts of universities and the corporate world. The World Wide Web, for instance, was developed at CERN but monetized in Silicon Valley. Fostering greater collaboration between universities and businesses should be a top priority across Europe. The region as a whole must restore in the European economy a spirit of progress and innovation. And for that to happen, Europe’s youth must be convinced that the EU is still a vibrant, fulfilling arena for their creative talents and their ambitions for a better world.

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The State of the European Union 2012 Edition – Revitalising the European Dream: A Corporate View

II - Austerity and Responsibility: The Economic Challenge
Europe’s challenge lies largely in a lack of competitiveness and a low level of growth that is perceived to be structural. These issues, respondents believe, can be addressed by curbing government budgets, increasing social flexibility, and promoting innovation and education. The EU can play a key role in enforcing budgetary responsibility among member nations, while also leading in monetary issues. Executives believe that the Eurozone should not be expanded, and potentially should even be shrunk. However, further integration, if necessary within a core group of nations, ought to be pursued.

1. Business leaders believe that lean governments, greater social flexibility, and a focus on innovation will move the EU towards growth and competitiveness.
Even more so than last year, executives in and outside the EU feel that the region’s current low growth is a structural phenomenon. More than 75 percent of executives see a competitiveness gap between the EU and other regions; about half believe that this gap will only increase in the coming decade. This combination of inherent sluggish growth and a lack of competitiveness can be countered, in their view, by focusing on innovation, research and development, and education. There is also strong and wide support for reducing bureaucracy and stimulating further labour market flexibility in order to increase competitiveness. “Europe is the largest economic entity in the World, but it underperforms because of too complex and cumbersome processes.” – Fernando Beccalli Falco President and CEO GE Europe & North Asia and CEO GE Germany Respondents across the board advocate an ongoing focus on limiting spending by member governments and enforcing fiscal austerity. Unsurprisingly, however, support for this approach is much stronger among respondents from countries with lower budget deficits: fully 96 percent of German executives approve of enforcing austerity, compared with just 65 to 70 percent of respondents from southern Europe (see Exhibit 2).

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Austerity and Responsibility

Exhibit 2: Executives support pressuring member states to balance their budgets; executives from countries with low deficits are nearly unanimous on that issue Support for increased pressure on effective and efficient government spending1) vs. government surplus
Support for increased pressure 100 BG 95 DE DK Support for FI increased pressure 1) AT NL 100 95 90 85 PL 75 IE GR 5 -11.0 -8.0 -7.0 -6.0 -5.0 -4.0 -3.0 -2.0 -1.0 0.0 ES RO IT 80 75 70 5 -11.0 1.0 I IE G GR -8.0 2.0 -7.0 3.0 SE
Avg. 83%

90 FR 85 UK 80 PT

HU

BE

F FR U UK PT

70

ES -6.0

Government Surplus as % of GDP, 2011
1) 2) Response to the question: “What would be the best strategies to reach higher growth in Europe?” – Continue pressure on member states on effectiveness and efficiency Small Euro States of government spending. Percentage of respondents choosing “agree” or “strongly agree” Portugal, Ireland, Italy, Greece, Spain

Small Euro States Non Euro States Core Euro States PIIGS 2)

Non Euro States PIIGS 2)

Source: International Monetary Fund, State of the European Union 2012 Survey, n= 1,930

Core Euro States

Our respondents’ belief in the structural nature of Europe’s current low growth and in the need for fiscal austerity makes clear that the corporate world has already picked sides in a prominent and highly contentious political and economic debate. Executives in Europe simply do not think that the current recession can be overcome by spending Europe’s economy back to growth; instead, structural adjustments and continued budgetary austerity will be required.

Nevertheless, austerity policy should always be coupled with a convincing growth agenda: only then can Europeans regain the confidence necessary to start new ventures and increase spending and investment. Many respondents, including younger executives, view the European economy as too rigidly set in its ways. Indeed, all too often, the EU’s mature economy has been coupled to a mature mindset: a lack of willingness to change, a tendency to shut the gates and

cling to entitlements. This is potentially Europe’s biggest challenge to growth. Yet, Europeans should not underestimate themselves: the region’s companies fare well in the global economy, aided in great part by their managers’ comfort with other cultures, openness to ideas, and excellent training. If, given greater competitiveness within the EU, that same openness and creativity can be applied to Europe’s home markets and to its overall system, the continent will flourish again.

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The State of the European Union 2012 Edition – Revitalising the European Dream: A Corporate View

2. The EU’s role in making renewed growth a reality is to focus on monetary and fiscal policy. The institution should be given increased authority in both areas.
Given the ongoing debt crisis, this year’s respondents support the shifting of budgetary policy to the EU even more than last year’s did. Respondents believe that the EU is a credible enforcer of fiscal authority among those member countries that have failed to control their debts. The European Union should be responsible for guiding and encouraging the transformation towards a union of competitive states with balanced budgets that is fit for growth. It is up to the national governments to translate and implement the EU’s directives regarding budgetary and monetary “Europe needs a united growth strategy, aligned to its go forward competitive initiatives, like any business does.” – Jim Barber UPS Europe President matters into concrete measures, local legislation, and practice. Under this vision, Brussels sets the framework and direction, which nations and regions then detail and implement – very much in the manner of corporations, where headquarters sets the strategy, leaving it up to local and regional business units to implement. It should be noted that in these vital matters, Brussels is not the distant bureaucracy it is often made out to be: in reality, the EU’s direction and strategy are still set by the congregation of leaders of each of the national governments. Respondents believe that a level playing field is more important now than ever before. An overwhelming majority of respondents support rigorously pursuing the single market. As to issues that lie outside the realm of economics and finance – including social, health and education policies – authority should rest firmly in the hands of national governments, respondents believe. Overall, respondents call for a more focused EU with a clear delineation of responsibilities between Brussels and the member states: the EU should lead in the budgetary and monetary realm, the nation-state in the social sphere. Survey respondents believe that the EU has an essential role to play in promoting free trade across the globe, but not at the expense of environmental and social concerns. A majority believe, for example, that rather than limiting competitiveness, strict policies on carbon emissions would actually provide a competitive advantage.

3. Although there is significant support for shrinking the Eurozone, executives see plenty of room for deeper integration.
There is very limited support among business leaders for further expansion of the Eurozone. Even more striking, a third of executives believe that the Eurozone should be smaller. Apparently, respondents prefer the perceived macroeconomic benefits of a strong core to the increased convenience and potentially greater profits available through a common currency. Respondents from nations with high GDP growth rates and low government deficits are much more likely to support the shrinking of the Eurozone. This can be broken down even further: the sentiment for limiting is strongest in the larger, more economically solid EU states such as Germany; 40 percent there are in support. Smaller AAA-rated states are less willing to shrink the Eurozone – support in Austria runs to 31 percent, and in the Netherlands it is 21 percent – and support among Southern states is even lower. Just 8 percent of respondents from Greece support shrinking the Eurozone (see Exhibit 3).

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Austerity and Responsibility

Exhibit 3: Support for shrinking the Eurozone is strongest in large, fiscally robust states and weakest in problematic economies What should happen to the Eurozone membership?
Category Category CategoryCategory
Large Core States Small Robust States Large CoreLarge States Small Robust States Core States Small Robust States
19% 26% 19% 26% 26% 25% 26% 25% 25% 54% 35% 38% 35% 35% 35% 43% 43% 43% 11% 30% 33% 33% 33% 30% 6% 6% 30% 30% 2% 3% 3% 3% 40% 38% 40% 38%40% 38% 35% 35% 31% 6% 2% 35% 31% 31% 24% 3% 24% 3% 25% 28% 28% 28% 21% 21% 21% Eurozone FR DE 3% 5% 3% 7% 4% 7% 34% 38% 43% 50% 50% 34%38% 34% 54% 25% 19% 25% 10% 18% 30% 18% 30% 18% 30% 25% 25% 29% 38% 34% 54% 19% 19% 23%25% 23% 23% 29% 29% 41% 41% 41% 50% 54% 49% 54% 44% 44% 42% 49% 49% 40% 38% 44% 11% 54% 42% 54% 42% 54% 73% 73% 35% 49%31% 49% 28% 24% 5% 25% 23% 3% 25% 49% 21% 10% 10% 25%19% 25% 25%

Large Core States

Small Robust States
10% PIIGS PIIGS

PIIGS
18%

30% 19%

54%

50% 54% 54% 49%

73%

33%

11%

11%

Overall
6% 2% 2%

5% 3% 3%5% 3% 3%

23% 23% FI AT BE NL 10% 10% 8%10% 4% 7% 4%8%

8%

OverallOverallEurozone Eurozone Eurozone FR Overall

DE FR

DE FR FI DE AT FI

BE AT FI NL BE AT NL BE IT NL IE IT

ES IE IT PT ES IE GR PT ES GR PT

GR

It should be expanded
Source: State of the European Union 2012 Survey, n= 1,933

Stay in its current state It should be expanded It should be It expanded should be expanded Stay in Stay its current statein its in its current state Stay current state Limit Eurozone toLimit fewer countries Limit Eurozone to fewer countries Eurozone to fewer countries Eurozone should should be abandoned Eurozone be abandoned Eurozone should be abandoned Limit Eurozone to fewer countries Eurozone should be abandoned

Support for limiting the size of the Eurozone, however, should be interpreted not as a vote against further integration, but rather as an expression of a pragmatic business reality. It makes sense to limit an alliance to the strongest players; weaker players just destabilize it. Because a complex alliance like the EU requires active management, a majority of executives throughout the EU support strengthening existing federal structures. After solidifying management, respondents favour deepening integration: executives from both the North and the South strongly support a continued push for the single market.

And non-European respondents, whose interests lie in maintaining the system as a whole, clearly support the concept of Eurobonds, the strengthening of the single market, and the further empowerment of the EU’s current federal structures and executives. Looking in from the outside, they see clearly that the greatest benefit for all will come from a unified EU whose members solve its problems together and satisfactorily. Eurobonds are a special case. Outsiders support the concept because they view them as beneficial on the whole. On average, Eurozone inhabitants agree; they are willing to show solidarity

and move towards further monetary integration by accepting Eurobonds. However, support for Eurobonds is much weaker among respondents from countries that consider they would have to pay the bill for this system. Taken together, respondents’ support both for limiting the Eurozone and for further integration suggests that business leaders are comfortable with a two-speed Europe: they are willing to move ahead with a stronger, if smaller, core because they see it as the best way to improve the current business environment; weaker countries can then catch up in due time without endangering the overall project.

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The State of the European Union 2012 Edition – Revitalising the European Dream: A Corporate View

III - Flexibility and Harmonization: Europe’s Social Structure
Business leaders rightfully feel a sense of pride in the social structures the nations of Europe have built up over the years, but they also feel that the EU would benefit from less regulation and more flexible social systems. European and non-European respondents agree that the EU should not take the lead in legislating the social realm or add another layer of regulation, but they also believe that the EU should take a steering role in harmonizing minimum regulatory standards across Europe.
A substantial minority of respondents feel proud of Europe’s various social systems. This feeling is strongest among respondents from the Eurozone and especially the EU’s founding nations. Respondents from countries with traditionally strong welfare systems also show the most willingness to export these structures across the EU. Coming from business executives, this is quite a remarkable message: even though they must work within these sometimes onerous social systems on a daily basis, and bear the brunt of their high costs, executives still feel pride in their continued existence. The majority of respondents, however, do feel constrained by their country’s social systems. They date from a past when Europe’s uniqueness and competitiveness were more clearly established; since then, the rise of globalisation has led to a complete change in the business landscape, in which European companies must constantly reassert their competitive prowess. Many of the regulations and social compacts of the past are inhibiting the EU’s competitiveness in today’s more global and challenging economy. This being the case, a greater degree of social flexibility is an absolute must if the EU is to become the agile competitor it needs to be. “Rigidity protects people in the short-term, but decreasing public expenditures, thereby reducing social taxes is the path towards restoring competitiveness and creating new jobs.” EU. Respondents view social regulations as the domain of the individual member states (see Exhibit 4). Instead, the EU’s task, according to respondents, should be to take a “steering” or “governance” role in the social arena. Executives are in favour, for example, of harmonizing a minimal level of social standards across Europe, which they see as a necessity for a single EU market. But this steering on the part of the EU should be accomplished, say respondents, in much the same way corporate boards set the “rules of the game” for their companies and enforce common values.

Flexibility and Harmonization

It is up to “national executives” – the national governments themselves – – Jacques Guers to take charge of their social arenas President Xerox Europe with other local actors. This national ownership, if coupled with a tendency Thus, there is no support among to overregulate, will continue to create respondents for more social regulation tensions in a global market with on the part of the EU, as it would further international corporate actors. However, diminish the region’s competitive agility. no obvious alternative presents itself; the There is no real backing, moreover, for a EU must steer the process of harmonization common social model across the entire while respecting national diversity. Economic and business issues

Exhibit 4: Business leaders favour EU leadership on economic issues, but are reluctant to delegate 13% Economic and business issues Social issues 23% authority on social matters 8% 33% 13%
Economic and business issues
33% 23% 23%
65% 74% 74%

Economic and business issues
23%

In which policy fields should EU sovereignty prevail 33% 13%over national states?
33% 13% 23%
74% 49% 49%

Economic and business issues

Social issues 49%
8% 36% 7% 22% 6% 22% 6% 20% 21% 20% 21% 23% 20% 24% 34% 12% 24% 34%
30%

Economic and business issues
33% 33%

23% 13%

13%
74%

8% 74% 36% 65% 41% 42% 49%
65% 41%

8% 74% 36% 65% Social issues 42% 49% 7% 22%
30% 30%

Social issues

65% 49% 30%

7% 22% 22%

3

6%

29% 27% 27%

36% 42%

8% 22%

7% 22% 20% 12% 20% 22% 23% 13% 20% 23% 9% 34%

29% 29%

20%

21%

23% 34% 24%

36% 41%42% 36%

42%41% 42% 12% 9% 9% 12%8% 13% 9% 13% Monetary

65%

41% 41% 9% 9% 9% 8% 9% Monetary 8% Monetary

Budgetary 9% and Fiscal Strongly Agree Budgetary Industrial and Fiscal Strongly Agree Agree

9% 12% 20% 9% 20%13% 8% 20% 9% Monetary 20% 12% Budgetary and Fiscal 12% Industrial

9% 12%20% 9% 13% 8% 20% 9% Monetary 12% Budgetary and Fiscal Industrial

22% 9% 20% 12% 20% 9% 13% 8% 20% 20% 9% Monetary 34% 12% Budgetary 34% and Fiscal Industrial 15% Strongly Agree

34% 15% 33%

12% Budgetary 34% and Fiscal Industrial 34% 15% 14% Education

15% Strongly AgreeEducation Agree

14% Public Health Public Health

Industrial 33% 15% 33% 14% Education 16% Public Health 16% Social Social

14% Education 16% Public Health Social

Agree Neutral Disagree

Neutral Education Disagree

Strongly Agree Agree Strongly Agree

Agree Neutral

Neutral Disagree

Strongly Disagree

Source: State of the European Union 2012 Survey, n= 1,906

Strongly Disagree

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IV - Acknowledging and Harnessing Our Strengths: Technology and Innovation in Europe
The financing of new technologies and a culture of innovation are not considered among the EU’s current strengths. However, if the Union can harness its formidable human capital in combination with its excellent infrastructure, the region has the potential for leadership in these fields.
When asked their opinion on the region’s technological infrastructure, respondents did not answer enthusiastically. This result is slightly surprising, given that many European countries are leading in various indicators of physical infrastructure. Of the 20 countries with the highest rate of broadband penetration, for example, all are in Europe, save South Korea.3 One possible explanation for this discrepancy is that on the whole, Europe is simply not perceived as an especially innovative region – a perception that colours the attitude of respondents towards its infrastructure. There is some truth in this perception: the region, for example, has no equivalent of Silicon Valley, with its vibrant ecosystem of startups surrounding large multidisciplinary campuses. Respondents noted two particular barriers to innovation in the EU. On the one hand, its innovation efforts are poorly funded, whether by national governments and the EU itself, or in the form of venture capital funding for technology startups. On the other hand, they say, Europe lacks the ambitious, hard-driving culture needed to lead in the field of technological innovation. Finding solutions to the problem of a lack of innovation in the EU remains a challenge. The top solution suggested by respondents involves increased cooperation between corporations and universities – even though they admit that such cooperation is really a symptom of success, not a cure for the problem. The good news, however, is that most business leaders agree that in addition to its excellent physical infrastructure, Europe is endowed with an energetic, well-educated workforce. Can the EU harness this core strength and focus its talent and energy to promote innovation? A significant number of respondents believe that the answer is yes. If the region is to do so, however, it must take such measures as prioritizing science and technology at every level of education. “Technology can provide the means to improve productivity, Europe has not yet fully leveraged this asset.” – Esko Aho Executive Vice-President Corporate Relations and Responsibility Nokia and Former Prime Minister of Finland

Acknowledging and Harnessing Our Strengths

3

International Telecommunications Union.

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The State of the European Union 2012 Edition – Revitalising the European Dream: A Corporate View

V - A Call for greater EU Leadership: Next Generation and the BRICS Perspective
Two subgroups participating in the survey – young respondents and BRICS executives – have little sway over the region’s current system, yet they are certainly affected by it. Despite their relative lack of influence, these executives are not especially radical or disenchanted with the European project. Indeed, as a whole, they add a sense of urgency to the debate. They are more worried about Europe’s current difficulties, but they are also more confident that the solution lies in maintaining and strengthening the Union, and are more ambitious about what it can achieve (see Exhibit 5).

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Exhibit 5: In each policy field, young respondents and BRICS executives are more supportive In policy elds should EU prevail of granting authority to the EU than average respondent In which which policy elds the should EU sovereignty sovereignty prevail over over national national states? states?
% agreeing In which policy fields should EU sovereignty prevail over national states? % Respondents Respondents agreeing Economic Economic and and Business Business Issues Issues
74 74 78 78 77 77 66 65 65 66 57 57 49 49 30 30 79 79

A Call for greater EU Leadership

Social Social Issues Issues

% Respondents agreeing
65 65 34 34

49 49 42 42 38 38 30 29 29 30

27 27

25 25

Monetary Monetary

Budgetary Budgetary and and Fiscal Fiscal

Industrial Industrial Overall Overall

Education Education Next Next Generation Generation (<35 (<35 Years) Years) BRICS BRICS

Public Public Health Health

Social Social

Source: State of the European Union 2012 Survey, Overall n=1,906, Next Generation n=308, BRICS n=96

1. Next Generation
The younger generation’s views regarding the EU suggest that they are in many ways even more supportive of the institution than their elders. In the eyes of younger executives, the EU remains a powerful force globally. They also want to see the EU play a more important role in a wider range of fields than does the average respondent. This should come as no surprise, given that Europe’s youth have rightly felt shortchanged by their national governments: unemployment among the young is as high as 49 percent in some EU countries. And although respondents of all ages agree that current social systems largely favour the older generation, younger respondents are particularly supportive of delegating even more authority to Brussels. As critical as they are of their national social systems, younger respondents remain more progressive than their elders on a variety of other issues. They believe strongly in prioritizing R&D, technology, and innovation over government spending and public debt. They are less supportive of free trade than the average respondent, and they enthusiastically support low carbon policies. The tendency to support the EU at the expense of national governments also expresses itself in matters of education. In general, young executives, like their elders, are pragmatic when it comes to education:

their priority is not with building a few excellent universities for just a few students. They strongly support practical solutions such as adopting best practice education methods from specific countries throughout the EU. They leave individual nations the power to decide how exactly to create the best synergy between businesses, universities, and technical schools. And like the average respondent, young people believe in the critical importance of adapting basic education to the needs of a globalised economy.

2. BRICS
“Europe needs to create more growth and jobs and for this, it needs to be less inward-looking and benchmark itself more against other Continents.” – Dominique Reiniche President Europe Group The Coca-Cola Company Europe and Europeans have at times received the criticism of being too selfabsorbed. To counter that tendency, our survey includes respondents from across the globe. This section will focus on respondents from the BRICS countries. Overall, executives from the BRICS countries express views very similar to those of their European counterparts. This may be explained by the fact that many of them were educated in Europe, spent a significant amount of time on the continent, and are fully imbued

with the norms of the international corporate elite. A key difference between the two groups, however, lies in their feelings about the gravity of the current situation: whereas half of our European subjects are concerned about the state of the European Union, an overwhelming 72 percent of BRICS executives feel this concern. Respondents from the BRICS countries are also more likely to believe that the current competitiveness gap is likely to increase. They are even more vocal than the EU population when it comes to stressing the importance of balanced budgets in the Union. These concerns, however, do not translate into distrust of the EU project. Actually, BRICS respondents are much more convinced that the resolution to these issues lies in granting more authority to Brussels. Across all policy fields, they are more pro-Brussels than their European counterparts. As outsiders, they are probably less sensitive to issues of cultural diversity, and put more faith in the economic benefits to be reaped through a coordinated EU-wide response to the current crisis. On a final note, it is encouraging to note that BRICS executives are also more positive about Europe’s technological infrastructure and culture of innovation than Europeans themselves. Is it because one needs to be an outsider to appreciate how technologically innovative Europe is?

Page 14

The State of the European Union 2012 Edition – Revitalising the European Dream: A Corporate View

VI - From Attitudes to Actions: Questions for Debate
The goal of our survey was to give the business community a voice in the discussion of the future of the European Union. In this report, we have attempted to summarize the attitudes and opinions derived from the survey. In doing so, however, we find that these answers raise further questions regarding the EU and the role of business in shaping its future. We have organized these additional questions below in an effort to stir debate on how Europe can best resolve its current crisis and build an enduring leadership role in the 21st century. Potential answers to these questions will shape our debate at the State of the European Union Conference on the 31st of May 2012.

From Attitudes to Actions

Economic
• The survey demonstrated
support for the idea of shrinking the Eurozone. Does this imply that there is also support for withdrawing one’s own country from the common currency? Or is it merely support for cutting out the weaker players? Is a “Northern Euro” a possibility?

Social
• The call for increased social
flexibility is not surprising, but can concrete actions really be taken to achieve it? What form might such actions take? Will the EU be able to balance the need for harmony in the system, while also leaving sufficient discretion to the countries?

Innovation
• When it comes to
promoting innovation, the EU should harness its human capital and promote a more innovation-centered culture. What is the best way to grow and attract the talent needed to produce more European innovation, better technology, and more active entrepreneurs? And who will pick up the tab?

Next Generation & the BRICS
• How can the EU create a
better education system in the midst of calls for lower public spending and taxation?

• In the light of the emerging
markets’ growing influence, where lies the EU’s comparative advantage in the 21st century? How can European countries transform the rise of new powers from a threat to an opportunity?

• In the same vein, is the call
for budgetary discipline mainly a call for some EU member nations to discipline others? Or do business leaders really support letting their own governments be scrutinized by Brussels?

• Can European labour
markets converge towards a true single market, and if so, how might this happen?

• There is considerable
support for giving the EU a larger role in harmonizing social regulations among all member nations. How can this be accomplished without increasing the number of cumbersome directives and regulations?

• How can Europe offer
a more supportive environment for startups and small and mediumsized businesses, and enhance their ability to innovate and successfully take their innovations to market?

• What measures should be
taken to stimulate growth in spite of austerity? How can the two be combined?

• By transferring budgetary
power from the national capitals to European institutions in Brussels, the EU would likely suffer a backlash in public opinion, with national governments taking a “laissez-faire” attitude in this debate. How can popular support be harnessed for increasing budgetary power in Brussels?

We call on all of you, executives and conference participants, to provide us with your responses to these questions, not just at the conference, but also in your comments and actions following the conference, you have and can continue to be an actor in this vital debate for Europe. Indeed, the continued progress of the EU project in the months and years ahead is likely to require an unprecedented level of commitment from those eager to see it succeed.

• How can the democratic
nature of economic politics be safeguarded if national governments have to obey Brussels?

Page 15

Methodology This report is a joint effort by Booz & Company, INSEAD, and the European Executive Council (EEC). In order to generate the “corporate view” on the future of Europe, we defined the target group of participants as executives who filled a senior role in the corporate sector. The survey was sent out to a sample from the global INSEAD Alumni Database and to Booz & Company clients. We received approximately 2,000 survey responses.

Exhibit 6: Survey respondents came from a wide range of regions, ages, and income groups

By Region
Europe 75% North America 14% Asia 6% South America 2% Oceania 2% Africa 2%

Europe – By Country
France 17% United Kingdom 16% Germany 13% Netherlands 10% Switzerland 5% Italy 5% Spain 4% Belgium 4% Denmark 3% Portugal 3% Greece 3% Austria 3% Sweden 3% Ireland 2% Norway 2% Finland 2% Romania 1% Hungary 1% Poland 1% Bulgaria 1% Others 2%

By Age Group
26.9% 18.0% 27.6% 27.4%

By Income Group
40.0% 45.0% 24% 18%

By Industry

31%

15% 7% 5%

6.7%

8.3%

15-35

36-45

46-55

Over 55

< 50k

50-150k

150-500k > 500k

Business Serv.

Finance

Info. Com&Tech

Energy

Cons. Goods

Other

Source: State of the European Union 2012 Survey, n=1,979

Acknowledgments
This report was written by: Per-Ola Karlsson Senior Vice-President, Managing Director, Europe, Booz & Company Bruno Lanvin Director of e-LAB, INSEAD Ludo Van der Heyden Mubadala Professor in Corporate Governance and Strategy Director of the Corporate Governance Initiative, INSEAD Robert Gogel Co-founder, European Executive Council & CEO, Integreon The survey, analyses, and interview campaign were led by: Anna Cohen Senior Associate Communications, Media & Technology, Booz & Company Berend Schrijver Consultant, Booz & Company Edward H. Baker Editor, strategy+business The help of Grail Research was instrumental in compiling and analysing the survey results. All are warmly acknowledged for their invaluable contribution to this report. The authors also express their sincere appreciation for the contributions, insight, and vision of: Denis Zervudacki Founder of the State of the European Union Christine Hirzel Executive Director of Communications INSEAD Tom Stewart Chief Marketing and Knowledge Officer, Booz & Company Art Kleiner Editor-in-chief, strategy+business Rob Norton Executive editor, strategy+business

About Booz & Company Booz & Company is a leading global management consulting firm, helping the world’s top businesses, governments, and organizations. Our founder, Edwin Booz, defined the profession when he established the first management consulting firm in 1914. Today, with more than 3,000 people in 60 offices around the world, we bring foresight and knowledge, deep functional expertise, and a practical approach to building capabilities and delivering real impact. We work closely with our clients to create and deliver essential advantage. The independent White Space report ranked Booz & Company #1 among consulting firms for “the best thought leadership” in 2011. For our management magazine strategy+business, visit strategy-business.com. Visit booz.com to learn more about Booz & Company. Contact information Per-Ola Karlsson Senior Vice-President & Managing Director Europe, Booz & Company +46 8 50619049 [email protected]

About INSEAD - The Business School for the World As one of the world’s leading and largest graduate business schools and with campuses in Europe (France), Asia (Singapore) and Abu Dhabi, INSEAD’s business education and research spans three continents. Our 141 renowned Faculty members from 35 countries inspire more than 1,000 degree participants annually in our MBA, Executive MBA and PhD programmes. More than 6,000 executives participate in INSEAD’s Executive Education programmes each year. In addition to INSEAD’s programmes on our three campuses, INSEAD participates in academic partnerships with the Wharton School of the University of Pennsylvania; the Kellogg School of Management at Northwestern University near Chicago, and Johns Hopkins University/SAIS in Washington DC. In Asia, INSEAD partners with Tsinghua University in Beijing and the Lee Kuan Yew School of Public Policy at the National University of Singapore. INSEAD is a founding partner in the multidisciplinary Sorbonne University created in 2012, and also partners with Fundação Dom Cabral in Brazil. Around the world and over the decades, INSEAD continues to bring together people, cultures and ideas from around the world to change lives and to transform organisations. Visit insead.edu to learn more about INSEAD. Contact information Bruno Lanvin Director of e-LAB, INSEAD +33 1 60712642 [email protected] Ludo Van der Heyden Mubadala Professor in Corporate Governance and Strategy Director of the Corporate Governance Initiative, INSEAD +33 1 60983319 [email protected]

About European Executive Council The European Executive Council (EEC) is an organisation that represents CEOs and top executives who lead and manage the European business of their multinational parent. Started in 2000, the EEC meets quarterly to debate and discuss the challenges and opportunities of doing business in Europe. The topics covered range from sharing best practices about organising and developing business in Europe and effective means of dealing with crosscultural management, to explaining the specificity of the European markets to non-Europeans, etc. The aim of the EEC is to provide its members with both formal and informal networking opportunities among peers to share ideas and handson experience. Visit dza.fr to learn more about the EEC. Contact information Robert Gogel Co-founder, European Executive Council & CEO, Integreon +33 1 47237755 [email protected] [email protected]

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