Quotes of the Day

For years, most talk about Western Europe's economy has been pretty gloomy. Growth has slowed in most countries, wages are stagnant, unemployment is stubbornly high, and consumers are miserly with their cash. Little wonder, then, that in France and Germany, the euro zone's largest economies, poor economic performance is in large part responsible for the sinking popularity of the countries' political leaders. Yet not everyone is hurting. In fact, many European corporations are raking in huge profits. According to business analysts FactSet JCF, the pretax profits of Germany's 30 top companies grew 69% in 2004, even as the country's gdp nudged up only 1.7%. In France, profits for the companies comprising the cac 40 index jumped 64% during the same period, compared to gdp growth of 2.3%. And profits for the 35 British firms included in the Fortune Global 500 climbed 51% last year. As BT Group ceo Ben Verwaayen says, "You can have healthy corporations in a not-so-healthy economy."

Not surprisingly, the positive-earnings picture is boosting the share prices of Europe's publicly traded companies, even as stocks languish across the Atlantic. Germany's dax index of 30 blue-chip firms has risen 12.7% since the start of this year, and last week reached its highest level since June 2002. France's cac 40 index is up 14.5%, and Britain's ftse 100 index is up 8.9%. Meanwhile, the Dow Jones industrial average of leading American companies is virtually flat, despite the fact that U.S. Federal Reserve Chairman Alan Greenspan says the U.S. economy is in the midst of a sustained recovery. So how are European companies locking in robust profits in an otherwise mediocre climate?

"Profits have been driven by cost-cutting," says Ian Stewart, chief European economist at investment bank Merrill Lynch in London. A lot of those costs have been eliminated by outsourcing jobs to Eastern Europe and Asia. Take German postal giant Deutsche Post World Net. Its net earnings increased 21.3%, to €1.59 billion, last year, helped by a drop in its tax rate to 20% from 30%. It has also saved almost €1 billion since November 2002 from measures such as integrating European transport networks and harmonizing its services under the DHL brand. The company also consolidated its worldwide IT infrastructure at three overseas locations. cfo Edgar Ernst can't help but boast: "Last year, we booked the highest revenues and operating earnings in the company's history."

Similarly, French electric component maker Schneider Electric saw its profits rise 30% to €565 million last year. Sales were up 18%. Schneider's 85,000-strong workforce actually grew 14% last year to meet demand, but the proportion of employees in Europe fell to 55% from 58%. Lower production costs for key items such as electrical-generation equipment are sending an increasing number of jobs to Asia, where the company has 42 factories employing some 16,000 people. The company recently announced its intention to close three factories in France with a total of 730 employees.

Of course, European firms that record lofty profits and don't eventually plow some of them back into jobs and higher wages at home are bound to find themselves at odds with their workers. With unemployment rates at or near double digits in countries such as Germany and France, unions and others have argued that pushing jobs overseas is a short-term strategy that will keep domestic economies weak. Jürgen Peters, the head of Germany's powerful IG Metall electronics- and metalworkers' union, has said it is "an illusion" for German companies to lower costs and boost profits by sending work abroad at the expense of German employees. Even so, the trend is clear — if European companies want growing profitability, they will increasingly seek it abroad.

• ANDREA GERLIN
• While Europe struggles with stagnant growth and rising unemployment, many corporations are enjoying robust profits by cutting costs and sending more jobs abroad