Another superpower is on the rise

Is the European economy sinking or swimming? The discouraging headlines are by now monotonously familiar. “Europe is lagging in global recovery,” declared the New York Times recently. “US Outshines Expanding EU in Economic Competitiveness Study,” reported Bloomberg in April. “Most Europeans who want to watch an economic recovery,” one US economist quipped in September 2003, “will have to watch it on TV.” (Okay, that was me during my farewell remarks as chief economist of the International Monetary Fund.)

But it’s not just economists and journalists who are discouraged; Europeans are as well. Beneath the veneer of exuberance surrounding the European Union’s (EU) recent eastern enlargement lies deep concern over the region’s economic future. Yet, recall how just 15 years ago everyone was heralding the slowdown and ultimate collapse of the US economic juggernaut. At the time, economist Paul Krugman wrote the popular Age of Diminished Expectations, which envisioned a US economy in perpetually low gear… But then the 1990s arrived with waves of technological innovation, and suddenly the free-spirited and relentlessly entrepreneurial US approach proved more adept at embracing new opportunities. So Japan dropped the baton and the United States reclaimed it. Times do change, and an economic system well suited to one set of historical circumstances often proves less appropriate for another.

Fast forward to 2004. Today, if you really want to get a rise out of top European policymakers and business leaders, don’t berate them about Europe’s well-known economic ills. Don’t mention the rigid labor markets, the aging population, or the weak state-run university systems. Instead, tell them that there is a one in three chance that the world’s leading economic superpower in 2050 will not be the United States or China, but Europe. They’ll stand and stare at you, waiting for the punch line.

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The truth is that Europe’s economy is far from hopeless. First, the notion that European firms and workers are much less productive than those in the United States is simply uninformed. The main reason why Europe’s output per capita stands at only 70 percent of US levels is that Europeans work less than Americans — a lot less. Europeans work fewer hours per week, take longer vacations, and retire earlier…

Second, Europe still has a spectacularly well-educated and versatile work force, even if dubious labour legislation holds it back, particularly in Germany. Third, recent empirical studies have convincingly shown that strong political and legal institutions drive economic growth… Finally, geography is another important driver of economic destiny.

Excerpted from an article by Kenneth Rogoff in ‘Foreign Policy’, July/August issue