A Run for the Money.(European companies good at business to business use of the Internet)

Much has been made of U.S. companies' lead in exploiting the Internet. Perhaps too much. The first major American business-to-business networks for older industries like autos and chemicals appeared only last year--and some of these B2B ventures have already failed. Meanwhile venerable European multinationals like ABB, DaimlerChrysler and Siemens are showing them how the Web was meant to work. Siemens customers can already order everything from mobile phones to trains online, and the company is now building a Center of E-Excellence to bring those efficiencies in-house.

That's just the first step. Siemens is effectively redesigning itself around the 'Net. The company's new nerve center will handle everything from buying parts to sharing information among the 450,000 Siemens employees. Located at the Munich airport, with branches in Atlanta and Singapore, the center has 50 staffers and is actively recruiting more. CEO Heinrich von Pierer expects the center to cost 1 billion Euro, and to save the company 1.6 billion Euro in expenses during the first year alone, much more after that.

When it comes to the New Economy, count Siemens as a convert. Now the Old World is full of true believers, all racing to catch up with America. Scholars and businessmen line up at seminars across the continent, seeking to unearth the secrets of the tech-driven productivity boom that has pushed the American economy to new heights in the last five years. From London to Madrid, governments are rethinking everything from laws to schools with the dream of a New Economy in mind. Leading Europeans--starting with central bank president Wim Duisenberg--eagerly watch for the new era to arrive. "I'm rather optimistic," says Philippe Maystadt, president of the European Investment Bank. "Europe as a whole is lagging behind the U.S., but there are areas where we have been catching up rapidly."

Technically, there is no New Economy in Europe, at least not in the American sense. European productivity has risen about half a percentage point during the 1990s, only one third the rate of increase in the United States. Compare the United States to other industrial powers by almost any measure of the tech-driven New Economy--number of PCs, Internet hook-ups, high-tech entrepreneurs, start-ups or venture capitalists--and you find Europe and Japan lagging way behind (chart). Europeans now gather regularly to worry over this state of affairs at newly established foundations like the International Institute of Infonomics in the Netherlands and conferences like one on "e-uropean e- conomic growth" in Luxembourg last week.

Why is Europe lagging? Breakthrough technologies often take decades to speed up economic growth. It's known as the "David delay," after Oxford economist Paul David, who argues that companies often go through a disruptive transition as they adopt new technology, hiding the fact that they are getting more efficient. Since the IT boom originated in Silicon Valley, and only recently took hold across the States, it's natural it would take even longer to reach across the Atlantic. "Europe will see a similar transition," predicts David. "We'll see a surge in productivity four to five years out."

Many Europeans are intrigued by the idea that the American miracle is in part a mirage. One reason the New Economy has been called "invisible" is that old accounting methods have trouble monitoring it. Since 1995 the United States has assumed that IT productivity rises in lockstep with computing power. So if a $1,000 computer doubles in speed from one year to the next, U.S. accountants "deflate" the value of the computer to $500--a price cut (or equivalent productivity gain) of 50 percent. If European countries corrected (some would say doctored) their accounts this way, they would get a huge productivity boost. America's lead in IT investment would fall from 8 to 1 down to just 2 to 1, says economist Patrick Vanhoudt of the European Investment Bank. "Europe is clearly at a disadvantage." says Vanhoudt.

But no one believes math tricks alone will close the gap. Just four years ago, stock markets in Germany, France and Italy set up new exchanges for small, fast-growing companies. Money started flowing in to fund good ideas that could never get a hearing from stodgy Old Economy banks. As global competition heated up, fearful authorities started slashing corporate taxes and streamlining the red tape that tangled up new companies. Such changes revolutionized Europe. For Americans, the 'Net was often just one more way to make a buck, says Birger Priddat, a German economist at the University of Witten. In Europe, "the New Economy means a new ...