American companies have stolen a lead over their European counterparts in the race for cyberspace because US business is unencumbered by rigid labour laws, the chairman of the Federal Reserve Alan Greenspan said last night.

Using unusually critical language at a hearing of the senate banking committee, Mr Greenspan said technology was not being applied as fully in Europe as in the United States, in part because labour laws made it hard for firms to sack workers and take advantage of technology-driven productivity gains.

"They end up with double-digit unemployment... and they also end up with a level of capital stock which is much lower than ours," Mr Greenspan said. "The technologies which now exist in the United States... are not being applied to the extent that they are in the United States, and therefore the growth and the underlying improvement is less than it is in the United States."

But Mr Greenspan also said attitudes were changing. "They are beginning to sense that that is wrong and you are beginning to see countervailing forces emerging in Europe which will gradually bring down a lot of the dirigiste attitudes on the part of a number of government officials in Europe," he said.

The Fed chairman cited the European Union's efforts to drag its businesses into the internet age. "The European Union is going to increasingly seek a type of technology that we have in the United States and that process almost invariably will open up markets."

The words will be music to the ears of Erkki Liikanen, EU commissioner for industry and information society, who is launching a modernising agenda for e-commerce in Europe. He says he wants Europe to learn from the experience of the US, where internet-related companies today account for 2.3m direct jobs - not count ing the considerable indirect employment. The legislation should be completed but the end of the year.

The US government has long urged European countries to make labour laws more flexible, but the Fed has usually been somewhat more restrained. Mr Greenspan also raised concerns about the recent increase in margin debt or borrowing to buy shares in US markets.

Charles Schumer, a Democrat senator from New York, said margin debt had increased 62% in the past year - the fastest pace in 16 years - and margin debt rose 13.2% in November and 10.8% in December.

"It is certainly the case that the numbers that you cite - especially for November and December - have caught our attention. They have moved up at a pace which has created a good deal of evaluation on our part," Mr Greenspan said. There had been "considerable discussions" among financial regulators in Washington on the topic. He said the Fed was "obviously" worried about this.