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View from Europe: What’s Holding Europe Back?

European business was hardly fazed by London's terror attacks. Other political and economic concerns could be more difficult to overcome.

A few days after the second wave of bomb attacks in London in July, The Daily Telegraph, one of the country’s biggest newspapers, ran a cartoon of the map of the city’s Underground. But this map was different from the one so familiar to locals and tourists. Summing up the mood of the city, it replaced each train-station name with words like “Worry,” “Cold Sweat,” and “Unease.” Despite its overall accuracy, the cartoon had one small omission — where the Underground passes through London’s financial district, there should have been a station called “Business as Usual.”

Indeed, for all the horror of the bombings, the business impact of the terror attacks was surprisingly minimal. The travel and retail industries bore the brunt, but for the most part, business was unshaken. Within 24 hours of the first series of bombings on July 7, London’s financial markets were trading much as they had been before the attacks. For European business, the attacks have been overshadowed by the economic worries plaguing the entire region.

Weighing on the minds of CFOs is what is now often referred to as “the crisis of Europe.” Bickering among EU leaders aside, the crisis boils down to the region’s lackluster economic performance compared with other industrialized countries. Evidence so far this year shows that 2005 is no different from the past 10 to 15 years — the GDP of the euro zone’s 12 countries grew only 1.3 percent in the first quarter — one-third the rate of the U.S.’s GDP — and most economists aren’t expecting growth to be much higher than that for the entire year.

What’s holding Europe back? For starters, the rigid and outmoded labor and social-welfare systems of the EU’s biggest laggards — Germany, France, and Italy. As economies globalize, these high-cost systems have put a stranglehold on many industries amid sluggish productivity and high wage growth, causing them to lose ground to lean, mean rivals like their low-cost neighbors in the east.

Solutions are by no means obvious, or painless. As Angela Merkel, head of Germany’s Christian Democrat Union party and the favorite to win the federal election this month, said in a recent interview with The Financial Times: “What do I do in an economy where 1,000 full-time jobs disappear every day, and where, at the same time, my entire social-security system — pension, unemployment, health, and nursing insurance — is financed by this shrinking pool of full-time jobs?”

How quickly politicians like Merkel find the answer to that question matters greatly to CFOs. If the crisis continues much longer, “Business as Usual” will look increasingly grim.

Janet Kersnar is editor-in-chief of CFO Europe.

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