Is Europe fated to be a digital colony?

By Matthew Lynn

LONDON (Bloomberg): Central bankers usually refrain from making jokes about other countries' economies; they follow the rule that while it's okay to be rude about your own family, it is a mistake to be rude about other people's.

That's what made Federal Reserve Chairman Alan Greenspan's remarks last week about Europe's current economic prospects so surprising.

Greenspan was asked by Sen. Robert Bennett, a Republican from Utah, what he thought of the euro and of the protectionism that pervades Europe's economic thinking. The world's most powerful central banker responded by describing a continent struggling to come to grips with the emerging digital economy.

"The technologies which now exist in the United States and are available in Europe and indeed elsewhere are not being applied to the same extent that they are in the United States," he said. "And therefore the growth and the underlying improvement in the European Community is less than in the United States."

His point -- to the degree hermeneutics obtain with the cryptic Fed chairman -- was that Europe has been so slow taking advantage of the opportunities opened up by the Internet that it now faces being relegated to a digital second division.

In this vision of the 21st century, America's giant "dot com" businesses will bestride the globe, with occasional opportunities for "dot de" (for Germany), "dot fr", "dot nl", or "dot co uk" competitors, turning Europe's economies into regional divisions of the world's leading web-sites.

Greenspan's insight is a provocative one, one that also troubles some of Europe's leaders. British Prime Minister Tony Blair has also expressed unease at America's growing digital dominance.

"So far not all the advantages of the new economy have crossed the Atlantic," Blair told an audience at the World Economic Forum in Davos, Switzerland. "There is relatively little evidence that either productivity growth or inflation in continental Europe has yet been affected by the digital revolution. Does Europe continue with the old social model, that has an attitude to social legislation and welfare often rooted in the 1960s and 1970s, or does it recognize that the new economy demands a redirection of European economic policy for the future?"

Greenspan and Blair are saying two things, both worth dwelling upon: that Europe is falling behind America in the development and exploitation of the Internet; and that this backwardness is the result of Europe's restrictive labor laws, and the insistence of many of its governments on meddling with economic policy.

And they're both asking the same question: Can Europe ever catch up with America on the Internet?

Even with a larger population, Europe has an estimated 43 million people connected to the Internet, compared with 102 million Americans. Though International Data Corp. predicts those numbers will level out by 2002 -- at 136 million users on both sides of the Atlantic -- it still estimates e-commerce will be US$291 billion in the United States, compared with $223 billion in Europe.

Moreover, the big global brand names of the industry -- Amazon.com Inc., Yahoo! Inc., E-Bay Inc and so on -- are all American. Europe is starting to produce some significant internet companies, such as Terra Networks SA in Spain, Freeserve Plc in Britain or Consors Discount-Broker AG in Germany, but they are all primarily national brands.

Europe has yet to produce a single player on the world stage. One way to get around that is to becomes partners with a U.S. firm, as Vivendi SA is doing in pursuing a stake in America Online Inc.'s European venture.

Strict labor laws and government meddling aren't the problem. An uncompetitive telecommunications industry that has kept connection prices high, sluggish retailers who have made computers expensive to buy, and a maze of restrictions, laws and cartels in different national markets carry far more blame.

The European Union shows some signs of recognizing the problem. It has promised to accelerate progress towards a single market in electronic commerce, ensuring that a company can use a single website to serve the whole European market. That will help. But it is also indulging in some futile gestures, such as trying to promote "dot eu" as a suffix to rival "dot com." The European internet industry needs a deregulated telecoms market a lot more than it needs a new flag-waving suffix.

A late entry into an industry does not mean a country or region is forever condemned to the second division, of course. The automobile industry was six decades old by the time the Japanese started exporting cars. That didn't stop Honda, Nissan or Toyota joining its leaders.

But unless the European economies can start to accelerate the rate at which they are adapting to the Internet, they may fall so far behind the United States it will be impossible to catch up. Greenspan himself noted that may spur reform. "My judgment is that the European Community is going increasingly to seek a type of technology we have in the United States and that process almost inevitably will open up their markets," he said.

Europe leads America in mobile phone use, and if some of the predictions about cell phones being the main access point for the internet turn out to be true, the imbalance between the two continents could be narrowed. If not, Europe risks turning into an American digital colony. That prospect alone should be enough to goad it into reform.

The writer is a columnist for Bloomberg News. His judgments don't necessarily reflect those of Bloomberg News.