It doesn't get much better than this. But is that the good news or the bad news?

Europe, despite three strong semiconductor companies-Infineon Technologies AG, Philips Semiconductors and STMicroelectronics-and several global electronics giants, including Philips, Siemens, Nokia and Thomson, is lagging the general, electronics and semiconductor markets in growth and is likely to continue to do so.

Pasquale Pistorio, president and chief executive officer of STMicroelectronics NV, is concerned that the U.S. economy grew eight times faster than the European economy in 2003. "And while for several years there has been a general consensus on the fact that the insufficient and improper use of modern technologies is one of the root causes of this differential, little has been done to address this vital issue," he told the International Executive Forum this May in Prague, Czech Republic.

In 2004, the United States is predicted to achieve a 4.6 percent growth in GDP, while Japan will hit 3.4 percent, said Malcolm Penn, chairman and chief executive officer of market research firm Future Horizons and organizer of the Forum. "The laggard is Europe, at about 2 percent," Penn said. "Europe is not enjoying the semiconductor recovery of the rest of the world."

In euro terms, the 2003 European market for semiconductors did not expand; rather, it contracted by two or three percentage points when measured in the local euro currency. The weakening dollar and strengthening euro mean that the United States has effectively exported its own manufacturing pain.

"The weakness of the dollar has been masking the overall weakness in the European market," said Penn. "The outlook for Europe has never been worse."

In addition, western Europe's lagging economic performance has been masked in part by the fast-expanding eastern European market. Ten countries in the east and south are being assimilated into the massive European Union, taking that body from 15 countries to 25. These are the old Soviet Union states of Latvia, Estonia and Lithuania; the eastern European states of Poland, the Czech Republic, Slovakia, Hungary and Slovenia, and the two Mediterranean islands of Cyprus and Malta. The move takes the population of the European Union from 350 million people to 450 million. Future Horizons' Penn warned that there are risks, and specifically that the accession could stimulate a mass exodus of production from eastern Europe to the Far East.

At the Semicon Europa exhibition in April 2004, Franz Richter, chief executive officer of Suss Microtec AG, a chip manufacturing and test equipment maker, said he was "pretty optimistic about this enlargement of the European Union. We talk about the better conditions in Asia. Well, we can find these conditions in Europe."

But he concluded that companies have to go where the market is, saying, "You can't ignore 8 to 9 percent GDP growth." Speaking at the same forum, Hermann Jacobs, vice president of Power Logics at Infineon Technologies AG, agreed that "the growth markets are in southeast Asia."

Carlo Bozotti, an STMicroelectronics corporate vice president and general manager of the memory product group who has been nominated as ST's next president and CEO , was less concerned about European challenges. He encouraged a global perspective: "Things are getting better on a global basis. Customers are more and more global, and there is broad growth across applications." Indeed, even though STMicroelectronics is investing aggressively in Asian manufacturing-in Singapore and with plans for a fab in China-it is also investing in European wafer fabs. "There is a clear trend to increase the value of the things we do. We have the opportunity to manufacture in Europe, but we must do so on value rather than on pure cost," said Bozotti.

As to the enlargement of the European Union, Bozotti said: "This will be positive for sure, for two reasons. One is the addition of 70 million more people." This will make the 25-nation European Union one of the largest consumer markets in the world and re-invigorate its demand for mobile phones, notebook computers and digital consumer products.

"Second, for some time eastern Europe has been a source of less expensive labor. Now it is also going to become important for design," said Bozotti, praising the IP Design Center that ST has brought up in Prague.

During the past decade, eastern Europe, particularly Hungary and the Czech Republic, had been centers of system-level electronics manufacturing and assembly work, but many of those companies are on the move as they see European Union integration driving up wages. Indeed, hardly had a number of contract manufacturers touched down in eastern Europe in the early part of this decade when they were off again to Southeast Asia. So in one sense the eastern Europeans are being forced to move up the food chain to design work.

In-Stat/MDR notes that on the demand side, there is no single "killer app" to drive market growth, as PCs and mobile phones did in the 1990s. The wide variety of lower-volume digital consumer products is subject to standardization and extreme competition which tend to suppress average selling prices.

And all of these calculations and predictions are based on the assumption that political tension in the Middle East can gradually wind down, if not be resolved. In March 2000, the European Council in Lisbon, Portugal, set out a 10-year strategy to make the European Union the "most competitive and dynamic knowledge-based economy in the world." It aimed to catch up and overtake American supremacy by 2010. But despite the bold words, there is practically no progress. Fundamental to the strategy was the intention that European R&D spending increase from 1.95 percent of GDP to 3.0 percent. According to ST's Pistorio, it isn't happening.

Future Horizons' Penn reserved most of his vitriol for the European politicians and bureaucrats he feels are letting the region down with reforms dogged by fudge and compromise and politicians tied to out-of-date ideologies and big gestures. "A decent economic plan today would be a hell of a sight better than a Grand Vision of tomorrow," said Penn, paraphrasing General Patton.