At the beginning of the 1990s, Western Europe is clearly facing more acute economic problems than are the other major countries of the oecd area. Both the United States and Japan seem to be hesitantly recovering in 1993 from their earlier, and relatively modest, slowdowns. Europe, on the other hand, after very slow growth in 1991–92, is heading into a slump that could well be deeper and more prolonged than the oil-induced recessions of 1975 and 1981–82 (Table 1). Gone is the euphoria that embraced the area in the late 1980s, when the rate of growth of output had (temporarily) surged. Its place has been taken instead by ‘Eurosclerosis’, a thesis already fashionable in the early 1980s, according to which the European economy is hopelessly ossified by (inter alia) overblown welfare states and powerful trade unions.

Pervasive ‘Eurogloom’ should perhaps be qualified. Even if trends over the 1980s and prospects for the 1990s look disappointing in comparative perspective, they remain very respectable in an absolute sense. Given a growth in population of less than ½ per cent per annum, average living standards rose by some 20 per cent over the last decade and could rise by a further 10 to 15 per cent in the 1990s. For an area that is already relatively rich, that is increasingly sensitive to environmental issues and that exhibits a strong preference for leisure, as shown by the comparative shortness of the working year, such increases in per capita incomes would be considered by many as being perfectly sufficient.

There are, however, two problems with this relatively Panglossian view of recent trends. First, slow European growth implies an increase in income inequalities within the oecd area. Figure a presents estimates of living standards (measured at purchasing power parity) for Western Europe, the United States and Japan. It will be seen that Europe’s catch-up on America, rapid in the 1950s and 1960s, stalled in the 1970s and came to a virtual halt more recently. Indeed, during the 1980s, Europe was also overtaken by Japan. While relative impoverishment at the international level must matter much less for welfare than does relative impoverishment within a country, the efforts Britain made in the 1960s to step up its economic performance, as it became aware that living standards had slipped behind those of France or Germany, suggest that policy-makers and public opinion may well display some sensitivity to cross-country income differentials.footnote1

Second, and much more important, slow growth in Europe has led to a massive increase in unemployment which must be contributing to the rise in income inequalities within most countries. Table ii illustrates the magnitude of the problem. From virtual full employment in the 1960s (a state probably never before witnessed in recorded human history), Europe had, by the early 1990s, gone back to rates of unemployment reminiscent of, and indeed often above, those of the 1930s. And while European unemployment before the War had peaked by 1933 and declined thereafter, there are no such declines in sight in the first half of the 1990s.

Interestingly, however, Table ii also shows that the area’s unemployment experience is not uniform. While virtually all the eec member countries are at present recording double-digit rates of unemployment, the five small non-ec members (Austria, Finland, Norway, Sweden and Switzerland) have, on average, had a much more favourable performance, even though their output growth rates have been only very marginally above those of the ec countries.

The rest of the article examines these two issues more closely. It first surveys the various explanations that have been given for the growth slowdown of the last two decades. It then looks at the rise in unemployment and at the reasons for the very different performance within Europe shown in Table ii. The conclusion summarizes the main arguments and presents some speculative comments on possible future trends.

Though the forecasting consensus in the early 1970s was happily projecting growth rates for Western Europe similar to those experienced in the previous two decades,footnote2 with the benefit of hindsight it is apparent that some deceleration was inevitable. A major reason is to be found in the gradual weakening of three factors which had strongly contributed to expansion from the 1950s onwards. First, trade liberalization which had stimulated investment in the manufacturing sector, was bound to slow down after the Common Market’s completion in 1968.footnote3 Second,