The European economy is in very poor shape.footnote1 Germany appears to be in recession and growth is at a virtual standstill elsewhere on the Continent. The European Central Bank’s monetary policy is too restrictive while fiscal policy is constrained by the infamous Stability Pact, which is perversely forcing countries to reduce their budget deficits at a time of economic slowdown. Finally, unemployment, already high, is rising again and welfare provisions are progressively being eroded. Against this stands the apparent dynamism of the developed English-speaking world. Quite apart from the remarkable records of Ireland, Australia and Canada (three countries that have witnessed rapid and uninterrupted growth for at least a decade), both the United States and Britain can boast of a very successful economic performance. They seem to have been more resilient to the bursting of the high-tech bubble, have clearly benefited from more flexible macroeconomic policies, and have been at, or close to, full employment for a number of years. It would thus appear that liberal, deregulated market systems function incomparably better than the more consensual, but also much more rigid, Continental economies. And Japan’s dismal performance over the last decade further strengthens this conclusion.
As with all broad-brush pictures, the previous paragraph is right in part, but also contains a number of simplifications, exaggerations and half-truths. For one thing, first-hand impressions are often dominated by recent events and fail to take a longer-run perspective. If this is done, the relative merits and demerits of Anglo-American versus Continental systems are much less apparent. For another, the picture omits to mention that the recent successes of the us and Britain are not fully sustainable. In both countries, the growth in output and the decline in unemployment were in large part driven by an accumulation of household debt that has reduced personal savings to exceptionally low levels. Rising house prices have been one major reason for these trends. As house prices subside and families restore their savings to more normal levels, a sharp slowdown in consumer demand is highly likely.
Yet even taking such a correction into account, the Eurozone’s growth and unemployment performance still looks relatively poor in both a short and medium-term perspective. Indeed, the bursting of America’s borrowing binge could worsen it further. It is not only American families that have over-borrowed, but the us economy as a whole. This has led to what most observers consider to be an unsustainable current-account deficit whose correction will require a substantial weakening of the dollar, a process that has already begun. Dollar depreciation will help the us, by raising both competitiveness and prices—a novel aim now that some countries are in fear of deflation. It will, however, hurt (and is already hurting) a European economy for which exports have been one of the few sources of strength. Weakening competitiveness, in other words, is adding to Europe’s economic problems and is highly likely to continue to do so for the foreseeable future.
This brief paper begins by surveying the comparative record over the last three decades, suggesting that this is much more uniform across the major areas than might be thought. It then examines the usual arguments that have been put forward to criticize the Continental model (and praise the Anglo-American one) and finds that while some are, indeed, valid, particularly in the area of economic policy-making, others are found wanting. It finally provides a brief look into the future which, if only for demographic reasons, looks bound to be less dynamic in Europe than was the past.
That Continental European performance has recently been sluggish is undeniable. In the three years that have followed the cyclical peak of 2000, growth may have averaged barely 1 per cent per annum, a record almost worthy of Japan’s 0.5 per cent and well below the nearly 2 per cent growth rates of the United States and Britain.footnote2 Yet, if one takes a somewhat longer view, the picture is not as stark. Table 1 traces the gdp growth record between 1973, the year which many argue marked the end of the postwar ‘Golden Age’, and 2003.
Over these three decades, Eurozone and British growth are the same and not much below those of Japan and the us. The latter’s apparent dynamism, however, owes much to demographic expansion. If population trends are taken into account, the growth of per capita gdp turns out to have been higher in Europe than it was in America. And it is, surely, the rise in living standards that ultimately determines whether countries are, or are not, economically successful.
Three features, however, could modify this conclusion. First, even if per capita gdp has been rising at broadly the same rate throughout the rich world, living standards are still quite different. In particular, Continental Europe (but also Britain and Japan) lag significantly behind the us. Comparisons of gdp per capita made in purchasing power parity, whether by the oecd or the World Bank, suggest that Americans were, in the early years of the twenty-first century, still some 30 per cent richer than Continental Europeans. In other words, one might have expected per capita gdp to have grown a good deal more rapidly in the Eurozone over the last three decades than in the us, as it had done during the ‘Golden Age’, so as to pursue a process of gradual catch-up.