For years, Americans have been hearing about economic stagnation in Europe, as well as stubbornly high unemployment, inflexible labour markets and a deep-rooted aversion to reform.
The truth is that Europe is back and very much so. The European Union (EU) has expanded over the past three years, bringing nations on its Eastern and Southern fringe into the European mainstream.
The EU expansion has spurred on the 15 oldest members, including the nine largest economies at Europe’s core, to revamp and reshape their economies to meet the challenges of the global marketplace.
Consider these facts: EU-wide growth is forecast to reach 2.7% this year, above US levels. Even Germany, long considered moribund, grew at 3.6% in the first quarter, proving that a high-wage economy can succeed in today’s global markets. Meanwhile, unemployment in Europe continues to decline, to below 7% next year.
Productivity growth, long Europe’s Achilles’ heel, was slightly higher than in the US last year. It is Sweden, once a bastion of Euro-socialist inefficiency, that is now the Western continent’s leader. It saw its GDP expand by 4.4% last year, its fastest growth rate since 1999 and considerably faster than the US economy. At the same time, it is running a healthy fiscal surplus.
In years past, European policymakers were bitter about the steady drumbeat of criticism from the across the Atlantic, but they must now realize that much of it was well-deserved. Indeed, Europe suffered from inertia, coasting on educational and industrial achievements of the past, and living off its accumulated wealth. This mindset is now largely a thing of the past.
Any doubters of Europe’s comeback should consider one quintessentially American statistic that powerfully underscores the improved outlook. According to Thomson Financial, Europe’s equity market capitalization has now eclipsed that of the US.
Europe’s 24 stock markets, including Russia and emerging Europe, now have market cap of $15.72 trillion, a bit higher than the $15.64 trillion market value of the US. That underscores the sentiment and expectations of investors worldwide about Europe’s economic potential and future prospects.
What explains the shift and the re-dynamization of Europe? Two points were crucial. First, Europe learned to learn from the US. Gradual deregulation, greater openness, support for entrepreneurship, moves to stimulate innovation and many of the other policies that have benefited Europe since the start of the decade have been selective imports of the US economic model.
Second, Europe at long last embarked on an effort to achieve success in the global knowledge economy - a challenge Europe very much shares with the US.
The so-called Lisbon Agenda, launched by the European Council in 2000, committed Europe’s leaders to boosting investment in R&D, slashing red tape, and knocking down bureaucratic hurdles to launching businesses as well as shoring up the continent’s strained social security systems. The main idea is to provide more and better jobs as well as greater social balance. The Lisbon Agenda is finally starting to bear fruit.
But while the world has become a competitive marketplace, the revival of Western Europe is by no means a threat to the US. On the contrary, achieving strong, sustainable economic growth in Europe has been a major goal of Washington’s international economic agenda.
The 27 nations that make up the European Union, plus several that have chosen not to join but remain closely associated with it, are not only a major market for US exports and the main source of overseas profits for US companies. They are also democratic nations with open, free enterprise-oriented systems in a world where liberal democracy is once more on the defensive.
This only underscores the way in which the economies of Europe and the US are closely intertwined. It also points to the creative potential to push each other to higher levels of performance.
At last week’s summit of the G8 industrial nations in Germany, the US might have found some things worth learning from Europe’s nascent economic success. For example, Europe’s future-oriented Lisbon Agenda includes both social and environmental sustainability as a key component. Countries such as Sweden and the Netherlands are achieving economic growth without sacrificing their social safety nets.
With concern about global warming and other environmental issues moving to the top of the international agenda, Europe’s efforts in this area could be a template for action on the other side of the Atlantic. Of course, while each country can learn from its peers, it must decide on its own road to prosperity.
Michael Heise is chief economist at Allianz and Dresdner Bank in Germany. This article first appeared in The Boston Globe.