In January of 2003, the European Union issued a new directive that banned the use of several suspected carcinogens in cosmetics products. The amended directive required companies—not only European companies, but those from around the world—to remove those chemicals from cosmetics products sold in the EU by September 2004.
The EU directive went considerably further than any regulation governing the cosmetics industry in the United States, which essentially favors industry self-regulation—as it does in many sectors. The industry trade group, the Cosmetic Toiletry & Fragrance Association, relies on a review board that has suggested that at least 19 potentially problematic ingredients (including a dye linked to increased risk of bladder cancer and boric acid, an ingredient in diaper rash ointment that has been linked to testicular development problems) be removed from products. While many CTFA companies have ceased using these ingredients, the Food & Drug Administration has done nothing to mandate their removal.
But the EU directive put American companies in an interesting position. They could choose to withdraw those products that failed to meet EU standards from the European market—a costly decision, given than the European Union is a market of 480 million consumers and a gross domestic product of $13 trillion—30 percent of the world’s total GDP.
Or companies could produce different versions of their products for the U.S. and Europe. Says Gloria Dittus, president and CEO of FD Dittus Communications in Washington, D.C., referring to recent regulations focusing on the consumer electronics sector: “Given the volume of the marketplace, and the manufacturing footprint needed to service it, it’s unlikely that manufacturers will only retool processes servicing one region and not others.”
The cost-benefit equation might look slightly different in the cosmetics industry, but the same factors need to be weighed.
Moreover, the decision to produce different versions of the same product for each market might be tough to explain to activist groups—like the Safe Cosmetics Campaign, a coalition of women’s, health and environmental organizations—who want to know why consumers in Europe are being sold safer products than those in the United States. Shortly after the EU directive was amended, The Safe Cosmetics Campaign wrote to 250 companies in the U.S. asking them to market only products that met E.U. standards.
Or finally, companies could reformulate all of their products to meet EU standards—the simplest and quite possible the cheapest solution.
“You have two things happening,” says investigative reporter Mark Schapiro, author of Exposed: The Toxic Chemistry of Everyday Products. “One, you have companies that have separate production lines for Europe and America. In other instances, when it comes to transnational companies, they are adopting one set of standards for their products, following tighter standards from the EU. So, for the first time, these American companies are actually following the rules of the EU…. In some instances business is getting ahead of the government.”
Some European regulations will only have an impact on how companies behave within the EU: rules requiring the makers of household appliances and other electronics equipment to pick up the bill for recycling their products, for example. These rules are likely to raise the cost of products in Europe—as companies pass the costs on to consumers—but won’t change anything on an international level.
Others, like the End of Life Vehicles Directive, which passed in 2005 and which calls for an increase in the proportion of re-usable, recoverable and recyclable components in automobiles, could lead overseas manufacturers—like Ford, which opposed the directive and has considerable manufacturing capacity in Europe—to shift some of their production to markets where the regulations are less onerous.
And some rules—like one prohibiting electronics makers from using lead, mercury, and other heavy metals in their products—are likely to have a global impact. Says Says Robert Mack, CEO of the Brussels office of Burson-Marsteller: “For many non-food consumer products, producers often want to produce to the same standards everywhere and will, therefore, produce to the highest standard, which is often the European standard.”
A Rising Power
And the incentive for companies to adopt EU standards is growing stronger, because the EU has in recent years been exporting its regulatory approach to the rest of the world. A recent article by The Economist’s pseudonymous columnist Charlemagne made the case that “Brussels is becoming the world’s regulatory capital.”
A Commission policy paper issued earlier this year found that European rules have inspired global standard-setting in areas such as product safety, the environment, securities and corporate governance, claiming that: “Increasingly the world is looking to Europe and adopts the standards that are set here.” And the paper called on the EU to encourage other jurisdictions to adopt the EU approach by “promoting European standards internationally through international organization and bilateral agreements.”
“More and more in recent years we have seen that countries around the world are importing the EU’s rules and standards,” says Tom Parker, managing director of European public affairs at Interel, the leading Belgian public relations and public affairs consultancy. He points to regulation on climate change, genetically-modified foods, and chemicals, and says the trend “is causing concern among foreign business leaders, not least because many of these countries do not share the EU’s cautionary regulatory philosophy, which often puts consumer first and heaps the burden of proof on industry.”
“Whether it is in the chemical sector with the REACH (Evaluation, Authorization and Restriction of Chemicals) regulation, or in the technology sector with the recent Microsoft case, the European Union is already positioning itself as a world regulator, increasing its influence on the global market,” says Carolyn Tieger, partner and global public affairs leader at Porter Novelli, who is based in the firm’s Washington, D.C., offices.
The sheer size of the EU market attracts the interest of exporters from around the world, who are keen to ensure that their products conform to EU standards. So Argentina, which exports about 7.5 percent of the world’s beef, has banned the use of growth hormones in its cattle. Says Mack: “They want to export their beef to the EU and don’t want to risk losing the opportunity to do so and consequently have ensured that their regulatory framework does not create potential clashes with the EU’s.”
With 480 million people, the EU is now the world’s largest single market, says Michael Burrell, who heads the European public affairs for international public relations firm Edelman. “As such it is bound to have a considerable influence on international regulation. In some sectors the EU has been ahead of the U.S. in setting standards and inevitably that has often meant that the EU standard has become a de facto global standard.”
But the size of the European market alone does not explain the rising influence of Brussels. The EU’s willingness to engage has enabled it to influence the decisions of international standard-setting organizations, says Parker. “This can be seen in the dominance of the EU GSM standard for mobile telephony, with over two billion users, since its introduction into EU law in 1987; in the influence the EU has exerted on Unece [the UN body responsible for economic cooperation] in the development of technical standards for automobiles; in the International Maritime Organisation; and on global accounting standards.”
Neighboring countries such as Switzerland, Norway and the Balkan states have been committed to keeping their regulatory regimes as close as possible to the EU’s approach. And with enlargement and the growth of the EU internal market, this trend is moving further afield. “The EU is well aware of its power in this regard and is in ‘regulatory dialogues’ with countries including China to help them improve regulation and to encourage them to adopt EU approaches,” says Parker. “The Commission is open about its ambition to have other countries follow EU rules.”
There are several reasons that the EU is respected by international standard-setting bodies, Mack believes. “For one thing, the EU may often have already developed its own rules and standards sooner than other countries. Foe another, the EU often then actively defends its own approach in such international bodies. And with 27 member states, the EU view often forms a significant “block” to which other countries are often willing to attach themselves. And finally, the EU often provides training of experts and technical assistance to developing countries in such areas to help them comply with EU rules.”
But a large part of the reason for Europe’s increasing influence is the fact that its values and its regulatory philosophy may be better suited to an increasingly global trading environment.
“The EU has progressively established itself as the environment advocate of the international community,” says Josep Catllà, chief executive of Weber Shandwick’s office in the EU capital. The reason, he says, can be linked to the political culture of Europeans and to the EU Treaty. “One of the principal mission of the EU is to promote economic and social progress for its peoples, taking into account the principle of sustainable development… and to implement policies ensuring that advances in economic integration are accompanied by parallel progress in other areas.”
Says Tieger: “While some may interpret it as protectionism when non-EU companies are told to meet EU standards to export their products to the European Union, aside from being trade competition tools, these standards also being promoted as protecting European consumers.” After a series of recalls involving toys made in China, for example, the EU announced that imported toys would have to meet EU standards.
But the toy import case also provides evidence that Europe is happy to work with the U.S. on some issues. Says Burrell: “If you take that example, it demonstrates the scope for trans-Atlantic cooperation rather than competition. The U.S. toy industry is working on a response from the industry as a whole—as opposed to from particular companies—and in all likelihood the industry in Europe will be happy to follow this U.S. lead to avoid expensive competing approaches.”
While most experts agree that European influence is on the rise, “I have been in conferences where the opposite view has also been expressed,” says Julia Harrison, founder and principal at Blueprint Partners, the leading independent public affairs firm in Brussels. “In general I think you see much more international discussion among regulators in general, driven by the phenomenon that issues are traveling cross border via NGOs and the Internet more quickly and frequently.”
“The answer truly depends on the business and type of regulation,” says Dittus. “For example, in the area of the environment, the EU clearly is setting high global standards, whereas in the United States, the strongest environmental regulations have traditionally come from individual states of regional consortiums.”
On the other hand, the United States clearly imposes more burdensome requirements in the financial arena. “Sarbanes-Oxley’s reporting requirements for the United States—and the expenses associated with them—have made it necessary for many global companies to reform their reporting practices in order to adhere to U.S. standards,” Dittus points out.
A Clash of Values
After genetically-modified food was introduced into the American food supply with relatively little fanfare or controversy in the early 90s, U.S. farmers and giant agribusiness companies such as Monsanto clearly expected a similarly smooth ride in Europe, particularly after they secured the endorsement of both senior scientists and the governments of most member states.
But European NGOs, raising concerns over the safety of genetically-modified organisms (the term “Franken-foods” became incredibly popular) and supported by European farmers who saw an opportunity to restrict competition from the U.S., succeeded in persuading the EU to adopt new labeling rules, resulting in a de facto moratorium of GM food products and reducing U.S. food exports to Europe dramatically.
It was, for many American companies, the first indication that the regulatory regime in Brussels was more complicated—and less friendly to their interests—than they had assumed. Other indications were soon to follow.
Another watershed occurred when the European Commission blocked the proposed $45 billion merger between two American firms, General Electric and Honeywell, which had already been approved by U.S. officials. The 2001 decision marked the first time a proposed merger between two U.S. companies failed solely as a result of European regulations.
Says Amie Kreppel, director of the University of Florida’s Center for European Studies: “Large U.S. companies wishing to implement mergers must now face an additional hurdle. Ignoring the EU’s regulations or the decisions of the Commission is not feasible given the significance of the EU market across almost all sectors of the economy. Microsoft and other American companies have felt the burden of EU competition policy in other realms unrelated to mergers such as unfair practices leading to market dominance.”
Microsoft, meanwhile, was learning that the EU had its own ideas about constituted unfair competition. In the U.S., the company had suffered through an anti-trust trial that damaged its reputation but imposed no real penalties. But in 2003, the EU ordered the company to unbundled its media player from its operating system and in 2004 it levied a €500 million fine citing the company’s ongoing abuse of its virtual monopoly on computer operating systems—a fine that was upheld last month when the software company’s appeal was rejected.
In each of these cases, American business leaders and conservative commentators cried foul, claiming that the EU’s decisions were motivated at least in part by the desire to protect domestic companies from competition. There’s no doubt that protectionist sentiment exists in Europe (as it does in the U.S.—see the Bush administration’s support for the American steel industry), but the reality is that the EU’s different take on all these issues has its roots in genuine differences of philosophy.
As The Economist’s recent Charlemagne column explained: “The American [regulatory] model runs on cost-benefit analysis, with regulators weighing the effects of new rules on jobs and growth…. Companies enjoy a presumption of innocence for their products…. The European model rests more on the ‘precautionary principle,’ which… calls for pre-emptive action if scientists spot a credible hazard, even before the level of risk can be measured.”
As a result of these philosophical differences, some Americans have accused Europe of an enthusiasm for the “precautionary principle” that comes close to requiring zero risk—an approach that, carried to its logical conclusion, would stifle innovation and economic growth and as a result ultimately cause more harm than it averts.
Europeans, on the other hand, counter that regulation in the United States often comes about only in response to a crisis—Sarbanes-Oxley is a perfect example—and therefore tend to combine the negative consequences of long-term neglect with the ill-considered over-reaction of a short-term fix. Or worse, they say, safety problems are neglected by lawmakers and so end up being resolved in the court, via costly and untidy litigation.
Says Tieger: “The European media have typically characterized American opposition to EU regulation as yet another example of the reactionary U.S. approach to regulation—that the U.S. only imposes mandates on industry after there is scandal or some evidence that harm has been caused, as was the case with superfund and accounting reforms.
“American businesses and other interested parties frequently counter that the EU does not amply consider business input when making decisions, and that it concentrates too heavily on hypothetical environmental and health concerns, with little to show for it in terms of actual public benefits, instead costing everyone in terms of growth, trade and jobs.”
“The EU essentially abides by the principle that if enough body of evidence accumulates around the toxicity of a certain substance, whether it is a carcinogen or a reproductive toxin,” says Schapiro. “Rather than wait for what is the final bit of clinching evidence, they ban certain chemicals to essentially prevent whatever harm it is that could be happening from happening.
“The United States tends to function under the assumption that final scientific proof on a question of chemical toxicity—that there will be a final resolution of scientific doubts—and then the agency can move forward. Well, how often does that happen? Not very often. We saw it in the global warming debate; the United States was waiting for the final answer on global warming while the rest of the world was seeing the accumulation of the evidence, which they at some point decided to act upon.
“The same thing happens with chemicals. The EU is willing to act on an accumulation of scientific evidence that suggest problems down the line to prevent certain problems from happening.”
He also dismisses the argument that the European approach stifles innovation. “To some extent, perhaps at a certain point in our history, that might have been true. But, now if you look at it, the imposition of principles to take the most toxic chemicals out of products in Europe is giving rise to a huge industry in green chemistry that is being prompted by the industry.”
Catllà acknowledges the potential for higher environmental standards to be interpreted as a form of protectionism, but says: “The EU is an unconventional mechanism. As such, it defies some conventional views on competitiveness. In poll after poll, Europeans call for a fight against unemployment, higher environmental and safety standards, the protection of social rights and economic growth. The combination of these different calls may appear odd to non-Europeans. However, these are the fields where the EU’s credibility is at stake, and where Europe is called to deliver. Therefore, environmental standards and consumer safety regulations attract great support among EU citizens.”
But regardless of whether European motives are pure or cynical (or some combination of the two), they pose a challenge for American companies.
“Given the tendency of the EU to ascribe a generally higher priority to protection of the environment, consumer health, safety and privacy as well as the minimization of free-market distortions resulting from monopolies and unfair trade practices, the increased impact of EU regulations may be welcomed by many consumers,” says Kreppel.
“However, the impact on businesses, and particularly large businesses, in America is negative to the extent that the EU now constitutes an additional regulatory hurdle over which neither American citizens nor American businesses have any direct say or influence.”
Schapiro agrees: “For the first time what you have is an economic power that’s the equivalent of the United States—it’s the equivalent in terms of affluence, in terms of education, in terms of overall sophistication and overall development—that is saying, ‘No, we can actually take these particular toxic chemicals out of these products, out of our computers, out of our pajamas, out of our cosmetics, and still be successful as an economy.’ So, essentially they’re calling the bluff of the United States. They’re calling the bluff of the U.S. industry by demonstrating that taking out substances deemed toxic can keep the economy going. The economic argument has been taken away.”
As a result, “I think the idea that Europe is somehow defining what is or is not safe is a brand new situation for many companies,” says Schapiro. “They are used to having a regulatory system which they, to some extent, have contributed to. So, suddenly they have a brand-new regulatory system in Europe which they had nothing to do with and can’t go do the usual stuff with campaign finance and lobbying and campaign contributions. It doesn’t quite work like Washington.
“So, there was a time when America was the central place where action was taking place; for American companies that action is now shifting to Brussels. That’s left them very disoriented.”
The American Invasion
Don’t expect that disorientation to last for long.
The increase in the EU’s power on the global regulatory front has not gone unnoticed by multinational corporations, says Parker. “We have seen many companies stepping up their efforts here in Brussels and the indications are that they will be increasingly concerned to make their views known to EU decision makers.” EU officials estimate that there are currently as many as 15,000 lobbyists in Brussels, about 4,500 of whom are officially registered with the European parliament.
It’s fair to say that lobbying on that scale was unknown in Europe before the emergence of the EU, when public affairs was handled largely at the national level: the Dutch parliament, for example, has just 100 registered lobbyists.
“In the last several years, more American multinational companies have recognized the increased impact of Brussels on international companies,” says Mack. “This has been driven by many specific cases in which what happens in Brussels is widely covered in the media, impacts the operating environment for companies, or both.”
Leading American efforts in Brussels is the American Chamber of Commerce in the European Union (AmCham EU), a group of around 140 companies from diverse sectors, including approximately 40 of the Fortune 100. Most of these companies have long-term investments in Europe, operate manufacturing plants throughout the EU and have created large numbers of European jobs.
In addition, more than 50 American companies, including General Electric, have relocated their European headquarters to Brussels, recognizing the importance of the city when it comes to regulatory affairs and cooperation with the EU.
“American companies, together with AmCham and the U.S. Mission to the EU have long been among the most active lobbyists in Brussels,” says Burrell.
The influx of American companies has also led to an influx of American public relations and public affairs firms. Burson-Marsteller, Fleishman-Hillard, Hill & Knowlton and Weber Shandwick—all among the biggest players in Washington, D.C.—have the largest public affairs operations in Brussels, providing local knowledge to companies more familiar with the American system than they are with the finer points of EU policymaking.
“Burson-Marsteller’s approach has been to develop a senior, stable, multinational team in Brussels capable of helping companies develop and implement winning public affairs campaigns,” says Mack. “It is important to have a range of experience, both sectoral—energy, environment, healthcare, transport, food and consumer, financial services— and functional: our consultants have worked in the European Commission, European Parliament, member state governments, the media, and NGOs. We support them with a network of public affairs specialists across European capitals that can help implement the outreach required in national capitals.”
In general, however, “public affairs firms need to operate with a more international perspective and a wider horizon, and not just see the U.S. position or the EU project goals,” says Harrison. “They need to understand the sector and company needs more profoundly in commercial terms, and be able to spot regulatory trends that start in one jurisdiction and transfer, like IP issues, licensing, or anti-trust.”
Consultancies “can provide local knowledge of how to advocate for our client’s interests in the different regions where we operate,” says Weber Shandwick Josep Catllà. “We do have global clients for whom we run PA campaigns in three regions (the U.S., EU and Asia) and while the goals are the same, the strategies and implementation activities are totally different.”
Problems have arisen when overseas management failed to listen to the advice of local experts.
“They need to understand that the EU is there, and that it is there to stay, with a growing influence on world affairs,” says Catllà. “They need to hear their management at their European operations and value its advice in terms of corporate and business strategies required in Europe. While companies will have the same objective in both sides of the Atlantic, the methods they use to achieve those objectives will need to be different.”
If they don’t learn to adapt their methods for the European market, American companies are going to find themselves facing a significant backlash. There are already signs that U.S. lobbying and public affairs techniques are creating antipathy among EU officials, Members of the European Parliament and other groups in Brussels, many of whom perceived a recent lobbying effort by the chemical industry as little more than an attempt to intimidate European institutions—and question whether the U.S. government would have tolerated a similarly aggressive campaign by European companies.
The REACH (Registration, Evaluation, and Authorization of Chemicals) legislation was born in response to the fact there was little or no publicly available safety or environmental impact information about the vast majority of the most widely used chemicals. In its initial incarnation, REACH would have required manufacturers to conduct extensive safety tests on about 30,000 common chemicals. The EU estimated the cost of the research at €3.6 billion; the chemical industry’s own estimate was more than double that amount.
The legislation was expected to prevent more than 4,300 occupational cancer cases per year, and achieve savings in health benefits of around €50 billion—a pretty good return on that initial €3.6 billion investment—over a 30-year period. “At present we are unwittingly testing chemicals on both living humans and animals,” said then-environment commissioner Margot Wallström in 2003. “It is high time to place the responsibility where it belongs: with industry.”
The idea that industry should have to prove that the products it sold met reasonable safety standards was not—initially at least—a particularly controversial one in Europe. But the ensuing lobbying and public affairs campaign by the chemical companies—described by many experts as the largest and most sophisticated lobbying campaign in the history of the EU—changed all that.
American companies were caught unawares by REACH when the proposals first surfaced. At that time, few American companies had a public affairs presence in Brussels, and tended not to take the EU particularly seriously. As Fred McEldowney of the American Chemistry Council told a reporter in 2003: “People thought the proposal came out of nowhere. They were not accustomed to having events in Europe have such a great potential impact on their businesses.”
American companies enlisted four powerful U.S. agencies in the fight against REACH, including the Environmental Protection Agency, the Office of the U.S. Trade Representative, and the Departments of State and Commerce. The belief was the only “EU heavyweights—other ministers and heads of states—could take on Wallström over the initiative. Following an effort to target EU member states including the U.K., France and Germany, in the fall of 2003 British Prime Minister Tony Blair, French President Jaques Chirac, and German Chancellor Gerard Schröder wrote to the Commission expressing their concerns that REACH would prove too costly.
In 2004, responsibility for the initiative was transferred to the EU’s Competitiveness Council and the focus of the debate shifted from the health benefits to the industrial costs, and in response to pressure from industry, the legislation was rewritten to apply to far fewer chemicals (about 12,000). Still, the version of REACH approved in December of 2006 was widely considered to be the strictest law to date regulating the chemical industry.
According to American Chemistry Council president and CEO Jack Gerard, the European Parliament “failed to produce workable chemical legislation. The compromise package approved by the Parliament has not addressed many of the key concerns repeatedly expressed by industry and major EU trading partners.”
So the chemical industry’s efforts were at best a partial success, even in terms of the short-term impact. More important, perhaps, many Members of the European Parliament and EU officials were appalled at the industry lobbying efforts—leading to increased cynicism about the corporate role in EU policy, and perhaps future restrictions on lobbying activity.
MEP Caroline Lucas says REACH “could have been groundbreaking. The safety of the chemicals present in everyday objects, from children’s clothes and toys to cars and computers is of paramount concern, both in terms of their impact on human health and on the environment. REACH promised to close loopholes, require the registration of thousands of unregulated but potentially harmful chemicals and ban the worst substances entirely.
“The corporate lobby groups were largely successful and more progressive views were sidelined… We ended up with legislation that failed to satisfy anyone: a missed chance to put public health above the interests of the chemicals lobby.”
The result is a call for much stricter regulation of lobbying and public affairs activities in Brussels, where the current standards for registration and disclosure are, ironically, much less stringent than they are in Washington.
A Different World
“Any firm that seeks to do lobbying the D.C. way in Brussels or vice versa is heading for trouble, as the two markets are different in very many ways,” says Edelman’s Michael Burrell. “Of course the basics of human nature and therefore effective communications are broadly the same, but the institutional and cultural frameworks are very different. The challenge is to work out what is general good practice that will work anywhere and what is done in a particular way because that is what works in that particular market. Within Europe, what works in London may be different from what works in Stockholm, Paris, Madrid or Rome—and even more different from what works in Moscow or Kiev.”
Many of the major differences between public affairs in Brussels and Washington are driven by fundamental differences between the two political systems, says Mack. “For example, The European Commission is not an elected—and politically oriented—executive the way a U.S. administration is. Also, campaign financing greatly impacts the debate in Washington but is not relevant in Brussels per se.
“The enormity of the U.S. federal budget compared to the EU budget also means that a focus of lobbying in Washington is on how that public money is spent, much more so than in Brussels.”
Tieger elaborates on that point:. “While the US is a nation state with a federal structure, the EU is a collection of nation states with only partial limitations to sovereignty. The institutional setting in Washington has been stable for decades, but the EU is in constant flux over whether to expand or even roll back Brussels’ powers, especially as the union grows to include more member nations.
“To be successful in Brussels, it is therefore necessary for American companies to adjust to the EU’s complex political system and decision-making process, from public consultation to the amendment sessions of EU directives by the European Parliament.”
As a result, “the tone and tactics used in public affairs campaigns in Brussels differ greatly from those of Washington, D.C.,” adds Dittus. “Unlike Washington’s ‘bare knuckles and backrooms’ approach, the legislative and regulatory process in the EU, is more about dialogue and negotiation between interested parties. For example, in a typical European business dispute requiring legislative or regulatory intervention, a social solution-based dialogue takes place. Essentially, if representatives from the business community and representatives of labor agree on a solution to the issue at hand, legislation can be fast-tracked through the process.”
To be successful in the European arena, therefore companies “must recalibrate their approach to public and government affairs to one of inclusion, compromise and understanding. Simply opposing a legislative or regulatory initiative without participating in a dialogue will not likely result in the desired outcome. The most successful companies in this arena are those that actively demonstrate to policymakers an understanding of the goals of prospective policy, and are committed to helping achieve a positive outcome.”
Says Professor Justin Greenwood of Aberdeen Business School: “In the absence of an EU ‘government’ with an inbuilt majority, every dossier has to find its own majority, meaning that alliances are key.”
Some were slow to learn that lesson.
“Over the past decade, American companies spent a great deal of time and money trying to prevent the EU adopting stricter environmental and consumer safety standards, reacting against fundamental EU political goals,” says Catllà. “In most cases, they failed. Sometimes they manage to delay the process. But even when they won support in Brussels, as in the case of the use of GMOs in food, they failed to make their position prevail on the national level.
“This trend has been quickly reversing. Some large multinationals are beginning to understand the drivers that motivate EU decision-making and are able to anticipate policy change, often gaining a strong competitive advantage.” As a result, Catllà says, American companies are increasingly concerned about their corporate reputations in Europe, are working to develop relationships with EU decision-makers, and in some cases are seeking to gain privileged market access for their products.
One major shock for many American companies is the influence wielded by environmental and consumer groups and other NGOs. “In general because the influence of NGOs is stronger in Europe than in the US, EU regulations may frequently be less business-friendly than their U.S. counterparts,” says Burrell. “The impact of NGOs is sometimes insufficiently appreciated by American companies. They need to work harder to understand the points of view and values of different stakeholders and to consider carefully when it makes sense to engage in dialogue with NGOs. But it has to be genuine dialogue. There is, on occasion, something to the caricature of the ‘big, ugly American’ corporation so busy telling it as it sees it that it neglects to listen.”
Edelman’s Trust Barometer research has consistently found that Europeans trust NGOs more than they trust corporations—and that the trust gap between NGOs and corporations is considerably wider in Europe than it is in the United States.
“Generally, NGOs are taken much more seriously than business,” says Catllà. “When it comes to environmental issues, more than 40 percent of Europeans trust NGOs compared to 1 percent who trust business. However, Europeans are well aware of the business role in delivering on their needs. They seem to be particularly fond of innovation, with wind and solar technology, nanotechnology, pharmcogeneteics and gene therapy widely popular.”
“Civil society interest groups of various national or international origins, NGOs and think tanks in the European Union all play a key role in policymaking,” says Tieger. “The European Commission supports the development of such organizations in order to assure a balanced counterweight to the interests of powerful industrial lobbies, and they have become an essential part of its governance model.”
In the U.S., the government rarely funds non-profit organizations, but that practice is not uncommon in the EU, where the Commission makes an effort to balance corporate lobbying by supporting and even setting up non-profit organizations.
“NGOs campaign well in Europe, have high levels of funding—often from the Commission itself—and move issues from other countries into Europe swiftly,” says Harrison. “Companies usually understand the difference if they are the tier one or Fortune 500 companies operating in international markets. Companies need to avoid making assumptions and generalizing about NGOs: patient groups are different from environmental groups from consumer groups and there are many different positions and regional differences.”
Still, it’s not just a matter of NGOs wielding an influence in Europe that they don’t have in the U.S.; it’s a matter of different philosophical approaches toward decision-making.
“I think this is an over-simplification,” says Mack. “Historically, the ‘European’ approach to regulation has been focused on developing consensus; thus industry itself is regularly seeking alliances with NGOs. Indeed, EU legislative processes make it much easier to block a proposal than to pass it, so developing consensus is critical to get a certain piece of legislation adopted.”
Dittus agrees. “The natural inclination of policymakers in the EU is geared toward finding collaborative solutions,” she says. “This, therefore, gives NGOs and other third-party groups a greater say, or perceived say, in the processes.”
Having said that, “NGOs, like companies, are an integral part of the EU due to its emphasis on consultation prior to launching legislative initiative in the hopes of identifying consensus,” Mack says. “Moreover, it is also important to understand that MEPs and officials are constantly striving to make their activities and legislative initiatives relevant to the European citizen: and many NGOs at least claim to be representative of various citizen communities such as consumer groups, open source software proponents or patient organizations.
“At the same time, due to the complexity of an EU of 27 countries, often only an alliance can successfully get a position across. Companies are therefore themselves reaching out to various NGOs to show to politicians and officials that their positions reflect broader interests.”
In particular, companies need to understand that some of the arguments that have been effective in killing discussion in the U.S. may not work quite so easily in Europe.
“While persuasive economic, social and technical arguments will always have an essential role in policy making, U.S. companies should also take into account the EU’s culture of compromise,” Tieger says. “During the legislation process, civilian and industrial voices are equally taken into account. Alliances are duly welcome. Because of the EU consensus-based approach, participants such as business, federations and NGOs are invited to work together.”
In the early 90s, in response to a dramatic increase in CO2 emissions from automobiles, the European Union began discussing ways of reducing emissions, and in 1996 a strategy was agreed: under a voluntary agreement, carmakers would reduce the average emissions from new cars sold in the EU to 120 grams per kilometer (a 35 percent reduction) by 2010. Interim targets were established, but by 2006 it became apparent that most carmakers were not hitting those targets—Fiat was the only company to have reached the 2008 goals, and only Citroen and Renault were on track to hit their interim targets—and environment commissioner Stavros Dimas announced that the EU would propose regulation that would make the target binding by 2012.
The German automotive industry, lagging behind in reducing emissions, responded with a public relations campaign suggesting that stricter standards would mean plant closures and job losses. German media coverage of the debate misleadingly implied that the Commission was planning a general cap on emissions—which would have been devastating for Germany’s high-performance and luxury cars—rather than calling for a reduction in average emissions.
In January of this year, German companies BMW, Volkswagen and DaimlerChrysler, together with the European units of Ford and General Motors, sent a letter to Commission President José Manuel Barroso, asking him to withdraw the proposed new standards, warning that the proposed measures would constitute “a massive industrial political intervention at the expense of the entire European, and especially the German, automobile industry…. The direct consequence would be the migration of a large number of jobs from the automobile manufacturers and the supplier industry.”
In February, the EU backed down and announced that it would set a binding target of an average reduction to 130 grams of CO2 per kilometer by 2012. The car industry was not happy—or at least, took the public position that the less ambitious targets proposed by the Commission were still “arbitrary and too severe”—but most observers saw the new standards as a victory for industry.
It was also an indication of the fact that while Brussels is important, major decisions still require the support of its member states.
About 80 percent of the decisions that matter to American companies are made in russels, according to Tieger. As a result, “lobbying activities should be targeted primarily at EU institutions, and particularly the European Commission which initiates the EU legislative process.”
Mack agrees. “Companies should take Brussels seriously and dedicate resource and attention to EU public affairs. New policy ideas are born in Brussels and a high number of stakeholders including NGOs congregate there.”
For example, the European Parliament and several NGOs have been pushing the EU to take a more active role in the public health arena, leading to discussion about best practices in public health as well as to several community-wide education campaigns. And the creation of the European Defence Agency means that companies with an interest in defense and security issues are now spending more time at the EU in addition to their traditional focus on NATO.
And Brussels continues to acquire additional policy responsibilities. The new EU Reform Treaty, for example, lists 40 policy areas that would be referred to Brussels.
At the same time, the European Parliament has a major influence on policy, and members of the Parliament are elected on a national basis, and are therefore particularly attentive to political issues in their individual countries.
“Both the EU institutions in Brussels and member state governments are important,” Mack says. “Getting the balance right—between Brussels and member states and also deciding which member states to prioritize—on a specific issue is often a key strategic challenge. There is no ‘one size fits all.’ It really depends on the issue itself, the decision-making procedures that apply to it, and the starting positions of the different players involved.”
“While Brussels is playing an increasing role in overall regulation, companies should not discount or ignore the fact that a significant amount of power and influence remains in individual member states,” says Dittus. “In order to achieve overall success, American companies should consider a two-pronged strategy that leverages investments, employees and assets in individual companies with key influencers in member countries, while also monitoring and engaging policymakers in Brussels.
“Ideally, the best effort would combine typical grassroots activities with a federal lobbying effort similar to the type that might be undertaken in the United States. Again, while the tactics may be similar, the tone must be different.”
A common mistake by American companies in Brussels is to overestimate the power of the European Commission and the European Parliament, says Burrell. “As a result, they sometimes put too many resources into Brussels lobbying and not enough into lobbying in national capitals of key member states, which is where the real decision-making power often rests.
“In general, U.S. companies don’t pay enough attention to London, Paris and Berlin and devote too much resource to Brussels,” says Burrell. “It is understandable, because it is easier, but it is not best practice. Unfortunately, it can be more complicated than that in countries like Spain, Germany, Italy, the U.K. and Belgium, where there is considerable devolution of power to regional level—so on occasion the lobbying needs to be done in Barcelona, Edinburgh or Munich rather than Madrid, London or Berlin.”
Indeed, even when regulations are created in Brussels, they are implemented locally.
Says Catllà, “regulating for 27 countries with diverging priorities and levels of socio-economic development, means that EU legislation is becoming more and more accommodating, general and even ambiguous, leaving Member States considerable leeway to implement policies. So after considerable effort influencing targets and objectives in Brussels, the job is only half-done and focused engagement is needed to ensure that those targets translate into workable and harmonised regulations across the European countries.”
Adds Harrison: “The amount of resource and effort that needs to go into lobbying at member state level can be a surprise and still relatively few companies run EU-wide campaigns across all member states. They tend to deploy a central campaign with peak support in some key cluster countries or a reliance on local operating companies to back the corporate team.”
What does all this mean for Washington? Is its power declining as Brussels rises?
Opinions are, not surprisingly, divided.
“In global terms, the answer is probably yes,” says Catllà. “The increasing EU power to influence or impact global business along with the rise of some Asian economic powers—manufacturing in China and technology developments in India—will take us to a new world economic order in which the U.S. will remain a key player but not the sole one.”
Says Parker: “The EU will continue to try to export its regulatory vision and will look to increase its influence in the coming years as it slowly encroaches into new policy areas. It will be interesting to see how policymakers and legislators around the world respond. What is certain, however, is that these trends present new and exciting opportunities and challenges for our industry.”
Others believe Washington will need to change and adapt to maintain its relevance.
“The U.S. remains the world’s most powerful nation and D.C. its most powerful city,” Burrell says. “But perhaps the U.S. needs to consider that it can sometimes be more effective in securing its goals by partnering with others rather than operating alone.”
Adds Tieger: “If Washington’s regulatory approach remains primarily reactionary, as we have seen with accounting reform as well as a multitude of consumer safety issues, then Brussels’ influence on global regulation may gradually usurp American standards. The U.S. must reassert and be more forward thinking when developing regulation, especially regulation with global impact. If the U.S. begins to set standards ahead of the global curve, those standards may in turn be adopted by the European Union.”
And others believe the future may lie in neither Brussels nor Washington, D.C.
Says Dittus: “The regulatory culture of the United States is largely defined, as is the culture of the EU. The real wildcard for government-relations and public-affairs professionals is the future regulatory environment in China. In the next five to 10 years, my guess is that businesses will need to place significant focus on figuring out what challenges may be presented in the Asian markets, and how to overcome the significant cultural differences between the east and west.”