Bending the World to Its Rules

Europe’s growing ability to dictate global regulations and business practices is worth watching.
From the April 2008 Trumpet Print Edition

A regulatory war has erupted between the European Union and the United States. Just ask executives at Microsoft. In mid-January, they were forced to set aside their whiskey sours and golf clubs and dig out their pinstriped suits and law books when EU Competition Commissioner Neelie Kroes initiated a new antitrust investigation into the goliath of American companies.

Kroes’s January 14 announcement was salt on an already painful wound for Microsoft. Barely three months had passed since the American behemoth caved in and ended its opposition to a 2004 decision by the EU that exposed the inner workings of Microsoft’s operating system to European competitors, reduced its royalty collection, and ensured it would pay fines imposed by the EU.

On February 27, Microsoft’s accountants again had to put in extra hours when, for the third time in four years, the EU blasted the corporate giant with another record €899 million fine. All told, Microsoft now owes the European Commission us$2.6 billion—no small change.

Microsoft, however, is only one of several American companies at which the suits in Brussels have pointed their legal cannons. Qualcomm, Intel, MasterCard, Google and Apple have all found themselves subject to claims lodged by EU antitrust regulators.

When Microsoft waved the white flag before the EU last October, the Wall Street Journal said this showed that “Europe now writes the rules for global business across the board—unapologetically to the benefit of its own industry” (Oct. 31, 2007; emphasis mine throughout). Microsoft’s capitulation, and the American government’s impotence in persuading the Europeans to cut it some slack, sent a clear message to U.S. companies looking to conduct business on the Continent: Your only option is to obey.

There is an unnerving reality behind the EU’s efforts to become the global trendsetter in regulations and business practices.

Europe Writes the Rules

It appears the antitrust angle is just a single theater in a much broader war by Europe on American business. “The European Union’s strategy to take the regulatory helm is evident in issues such as climate change, chemicals regulation, genetically modified organisms and antitrust regulation, for which Europe has adopted legislation or enforcement regimes that are stricter than those of the United States—and that, through the ‘California effect,’ are forcing changes globally,” wrote analysts at Stratfor (January 17).

Stratfor’s use of the term “California effect” refers to the American phenomenon in which California, as one of the largest and wealthiest states, can virtually dictate national policy by setting its own state regulations and forcing nationwide corporations to either comply or lose that state’s business. In the same manner that major U.S. companies can’t afford to ignore California’s market, few multinational corporations can risk giving up their presence in the massive and highly lucrative European economy by rejecting EU rules and regulations. This explains why Microsoft caved to EU demands last October.

In June 2007, the European Parliament signed into law the Registration, Evaluation and Authorization of Chemicals (reach) regulation. Ostensibly designed to protect the health of Europeans, it bans certain chemicals, severely restricts others, and requires strict testing, reporting and registration of all chemicals imported into Europe. This single law could revolutionize the global chemical industry. Any company wanting to sell chemicals to Europe will be forced to meet its guidelines. Reach will likely affect American chemical companies the most. They are the largest in the world, and now they are having to spend millions of dollars testing, reporting and registering their products to conform to EU standards.

Reach essentially gives European nations the power to dictate global policy in chemical manufacturing. In fact, its effects ripple beyond the chemical industry. For instance, all foreign cosmetic companies wanting to export to Europe must register the chemicals contained in their products. To be fair, this regulation will also apply to European companies. The only difference is, foreign companies have until June 1 this year to comply, while their counterparts on the Continent have at least three years before they are required to do so.

Reach gives the EU an unmatched ability to exert its influence far beyond its own borders and into the industries—hence the economies—of other countries.

Living by Its Own Rules

The EU’s modus operandi is virtually the same in relation to the highly politicized issue of climate change. On January 23, EU leaders in Brussels announced “a sweeping package of measures to combat climate change that sets a global standard and means major changes for how Europe gets its energy” (Time, January 23).

Problem is, the EU’s strategy for solving climate change is so extreme, some fear that European companies will be driven to relocate to countries with less-stringent environmental laws. How does the EU plan to prevent such an exodus? Instead of tempering the policy to make it more achievable, it plans to impose “carbon tariffs on imports from countries that fail to sign up to a global climate change deal, such as the U.S. and China” (ibid.).

Europe has every right to blaze the path toward addressing this illusory problem. But it is doing so by imposing its standards on the rest of the world and proposing to penalize any nation that doesn’t comply—even when European companies say that compliance is impossible!

Then there is the issue of genetically modified foods and crops. In November 2005, the World Trade Organization decided that some European states were breaking international trade rules by not allowing the import of gm crops and foods. The wto asked the European Commission to bring its member states into line with wto rules regarding gm crops and foods. After two years, that deadline expired January 11. The European Commission failed to enforce the widely accepted wto rules; instead it asked the wto for more time to work with the member states to help them bring national regulations in line with global trade laws. Two years wasn’t enough?

Note the trend: On antitrust issues, climate regulations and its new reach law, the EU is quite happy to impose new regulations—oftentimes at great cost—on America and the rest of the world. But when it comes to genetically modified foods, the EU lives by its own rules.

More to Come

You can be sure Europe’s regulatory imperialism will only grow more intense.

European stock markets were pummeled mid-January—many suffering their worst single-day drop since 9/11—as a result of growing fears that the American economy is on the precipice of a recession. “As if climate change and chemicals policy regulations … were not enough,” wrote Stratfor, “the subprime mortgage crisis’s impact in Europe has heightened Europe’s perception of the United States as a laggard. Bankers and regulators in Europe argue that lax U.S. regulation of mortgage-backed securities is responsible for the problems in Europe emanating from the subprime crisis …” (op. cit.).

As America’s economic recklessness ripples out to impact European economies, European leaders are brainstorming for ways to regulate, protect and even guide the global economy. Surely it won’t be long before we see the EU imposing new laws and regulations to protect its monetary interests and safeguard the global economy. After all, tumultuous times demand far-reaching solutions—and European leaders never miss an opportunity to extend their bureaucratic power.

After the EU victory over Microsoft last year, Mario Monti, the former EU competition commissioner responsible for Europe’s success, told an Italian newspaper that putting such U.S. giants in their place was “the true strength of a united Europe.”

That’s a telling statement.

Neelie Kroes, the current European commissioner for competition, celebrated the decision by musing about how low she’d like Microsoft shares to fall.

Americans ought to consider the spirit of these statements. This isn’t a series of independent, unrelated battles between Europe and certain specific companies or industries in America. This is not Europe versus Microsoft; Europe versus Google; Europe versus gm foods, or Europe versus American chemical companies.

This is Europe versus America!

Monti and Kroes are not backwoods political renegades; they made these statements while holding the post of EU competition commissioner—the person responsible for shaping the European business environment and managing the ability of foreign companies to participate in the European market. “EU Competition Commissioner Neelie Kroes wields much more prestige and power than her counterpart in the United States,” wrote Stratfor. “The power given to the competition commissioner likely reflects the EU view that such regulatory powers offer political and strategic benefits …” (op. cit.).

Ultimately, this is the crux of the matter. By using its own economic largesse to set global regulations and define global business practices, the EU is steadily gaining the power to transform the global economy.

History offers a powerful lesson we would do well to remember as we watch this trend continue: The nation controlling the world economy possesses the political and strategic power to shape the world.