IT IS not difficult to be pessimistic about the future of European business. Compared with the awesome strength of America and the raw power of emerging Asia, Europe is sometimes portrayed as a has-been, excelling in luxury goods, fine food, wines and fashion but weighed down by too many old industries and old ideas. From microchips to microbes, poor old Europe seems to trail in America's and Asia's wake.

America enjoys awesome advantages over Europe. It is a huge, truly single market with a relatively youthful, growing population. It is the world's economic superpower, with much higher productivity than its competitors (though productivity growth has recently been disappointing, and last year was slightly below Europe's). It has world-class universities that work hand in glove with business. Americans have not only won more Nobel prizes, they have turned more scientific advances into profitable businesses than anyone else. Many of these firms have gone on to become the giants of modern business.

It may have been a British scientist, Sir Tim Berners-Lee, working at a laboratory in Switzerland, who invented the world wide web, but America is the home of the internet and all the business sectors it has spawned. And even where Europe is holding its own against America, it seems unable to retain its advantage. Boeing drifted badly in the 1990s as Europe's Airbus made strides, but having merged with McDonnell Douglas the American giant bounced back. It is now taking market share from the Europeans.

America's economic growth, averaging 2.5% a year since 2001, has reflected this dynamic business culture, whereas Europe has managed an average growth rate of barely 1.5% over the same period, though the pace has picked up in the past year. Europe's sluggish performance is often put down to the poor business climate. Rigid labour laws and strong unions make it difficult for firms to fire redundant workers and unattractive to hire new ones. Product markets are not as competitive as America's, and the single European market has yet to become a reality in areas such as banking and services.

Corporate governance too is variable: transparent and world-class in Britain, but often inadequate in continental Europe. In Germany workers sit on boards, and in France even small firms have to have an employees' committee that can make life difficult for management. Minority shareholders do not always get enough say.

Moreover, European governments like to meddle. France has drawn up a list of strategic industries, including casinos, that it thinks need special protection from foreign takeovers. Even Spain, with its new Anglo-Saxon business culture, tried to stop a German utility from taking over a Spanish power company. Telecom Italia's attempts to hive off its mobile-phone business became highly politicised.

Many European politicians are fearful about the effects of globalisation and the rise of China and India. France's vote against the European constitution in 2005 was partly a protest against globalisation, which is blamed for persistently high unemployment there.

Certainly Asia has been making itself more strongly felt in Europe in recent years. Japan now has car factories in France and the Czech Republic as well as in Britain, and imports from South Korea's resurgent car industry have been causing difficulties at Renault and PSA Peugeot Citroën. India's Tata Group too is planning to export cars to some southern and eastern European markets where they will provide more competition for the traditional west European manufacturers.





Europe's pride

Yet even though European business has to operate in a difficult political, social and economic environment, it has produced an impressive crop of world-class companies. An analysis by McKinsey, a management consultancy, shows that Europe has 29% of the world's leading 2,000 or so companies, broadly in line with its 30% share of world GDP. It punches its weight in most global industries except IT, where America is leagues ahead (see chart 1).

British companies were pioneers of globalisation, perhaps because of Britain's open Anglo-Saxon business culture and financial system. More recently Britain's BP bought several American oil companies, triggering a wave of oil mergers in America and Europe. But then Britain is closer than its European cousins to the freewheeling American business model, which is why this special report will concentrate mainly on continental Europe.

Over the past few years those continental European countries have been gradually shedding their old corporatism and learning new tricks from the Anglo-Saxons. Jeff Immelt, who succeeded Jack Welch at the helm of GE five years ago, is struck by the vast improvement in European top management in recent years. As he points out, most big European businesses are now successfully global. The figures bear out Mr Immelt's impressions.

Kevin Gardiner, head of global equity strategy at HSBC, an investment bank, who first spotted the Celtic Tiger miracle of the Irish economy a decade ago, has recently made another remarkable discovery: European businesses are making better profits than their American counterparts (see chart 2). He notes that “currently European companies seem to be slightly more profitable even than their American peers.” This has been achieved even though revenues have been growing more slowly than in America, which underscores Europe's growing success in restructuring and consolidation. Corporate America and corporate Europe are now neck and neck in the globalisation stakes.

Dominic Casserley at McKinsey's London office also takes a bullish view. “Write off Europe at your peril,” he says. “In many sectors European companies are clearly in the premier league. We see a generation of strong European management teams emerging who are aggressive, hungry and eager to expand.”

Some of this revitalisation of European business is due to the impetus from a more open trading system in a global economy. European companies, small as well as large, have quietly got on with moving many of their operations abroad where it makes economic sense to do so.

But two other powerful forces are also at work. One is the structural change now taking place in Germany. After years of languishing, Europe's biggest economy is beginning to feel the benefit of reforms, particularly to its financial system.

The other force is a gush of private-equity finance, much of it originating in America and landing in Europe. This started only a few years ago, but already private-equity and venture capital invested in Europe totals €173 billion ($225 billion) and is growing by leaps and bounds.

Donald Gogel, the boss of Clayton, Dubilier & Rice, an American private-equity firm, sums up the benefits: better governance; a more stable shareholder base; upgraded management talent; higher expectations; and a sense of urgency. Private equity gives the owners of the business direct control over its performance. If managers succeed, they earn a lot of money. If they fail to perform, they are replaced. Americans have known all this for a while, but Europeans are learning it fast.

This special report will ask how European companies, large and small, are coping with global competition. It will examine the boom in cross-border mergers and takeovers in Europe and look at the fundamental changes in German business. And it will argue that European business is better than its reputation.