The U.S. corporation in Europe, to and beyond 1992.

• Author: Rajendra, Eric J.
• Position: Single European market

The U.S. corporation in Europe, to and beyond 1992

With the integration of Europe's financial services on the horizon, how should U.S. companies react? Are there benefits to be captured and, if so, how fast must CFOs move? Most American financial executives with any involvement in Europe are acutely aware of the fact that monitoring, understanding, and taking advantage of the process of European financial integration will have enormous implications for the profitability of their European operations over the next 10 years. Yet, even after the latest presentation by their investment and commercial bankers on what is happening in Europe, confusion reigns about the conclusions they should draw for their own corporate financing strategies.

Should American multinationals, who have generally taken a pan-European--even global--approach to financial management, be mildly interested in the changes occurring in Europe? Or are the fruits of financial integration entirely for the benefit of small European corporations? Do the key financial services directives, which enable universal banking across Europe, mean that American corporations should assume a "holistic" approach to corporate funding (i.e., equity, bond, and debt markets)? And in light of the continuing spate of mergers, acquisitions, and strategic alliances of all sorts among European financial intermediaries, with which financial intermediaries should companies start building relationships that will appropriately position them in the 1990s?

From fragmentation to integration

Before the current period of European Economic Community-induced change leading to an integrated market beyond "1992," European financial organizations could have been described as being in a complex matrix of fragmentation. In other words, financial institutions were fragmented by country (and consequently by language and corporate culture), by type of product specialization (mortgages, consumer loans, investment advice, equity brokerage, etc.), and by type of customer segment covered (retail, corporate, government, etc.).

Over the last several years, this rather fragmented, but nevertheless highly definable, market organization has been transforming itself into a more fluid structure within each national market. The early roots of this change could be termed international in nature: the fallout from global financial deregulation and the impact of technological applications in financial markets and products have both enabled financial institutions, even in Europe, to build across this matrix of fragmentation and specialization. But perhaps the most vital force of change has been the European Commission's rather revolutionary deregulatory approach since 1985 in the area of financial integration. Instead of painfully harmonizing away the myriad of national regulatory differences, the Commission opted for what has become known as the "dynamic disequilibria" approach.

Two key directives form the guiding philosophy of this new approach: the Second Banking Directive and the Investment Services Directive. After the basic rules in the provision of financial services are harmonized, financial institutions, appropriately registered in one EEC country, can offer their services across Europe and be supervised...