Is Europe Finally Back?
Between 1945 and 1970, average GDP per person in Europe increased from 40 per cent to 70 per cent of the US level. In the 1970s, that level stagnated and Europe started declining. In 2000, the famous Lisbon Agenda was launched by EU leaders, aiming at closing the prosperity gap to the US in ten years. Since then, the gap has widened. Europe’s has seemed destined to become little more than a museum for rich Indian tourists, while the US could maintain a robust economic growth.
The free-market reforms in the US in the 1980s and the subsequent rise in productivity in the 1990s boosted the economic lead of the US. Employment and living standards have thus developed better in the US than in most of Europe. For years, however, the new centre for free-market reforms has been Europe. According to the World Bank, a majority of reforms that improve the business climate in recent years have been European.
The 2008 Index of Economic Freedom (Heritage Foundation) provides similar evidence. Of the 20 countries in the world with the freest economy today, 10 are European. In 2008, 19 European countries had increased their economic freedom compared to the year before. The degree of economic freedom is strongly correlated with economic prosperity. The EU has had higher economic growth than the US during the past two years, and forecasts show that to be likely during the next two years as well.
A difference in economic growth of one per cent in one year is not dramatic, but if it remains for a decade, that will have an impact. Growth not only determines incomes and living standards. In a globalised economy, it shows which countries are at the top of the value chain of global enterprise. Also, in the end, growth will determine global influence. A persistent difference in growth rates will be noticed long before its full economic effects, not least in terms of how countries are viewed by their citizens and foreigners alike.
In Eastern and Central Europe, the difference compared to 20 years ago is overwhelming. But almost every country in Western Europe has also reformed during the past decade or two, leading reformers being Ireland, Sweden, Spain, Britain, the Netherlands, Denmark, Iceland and Finland. Admittedly, little has happened in France, Germany and Italy, but most others have improved.
Reforms implemented by several European countries include: De-regulations of product and labour markets, decreased taxes and public expenditure, privatized state-owned companies, reform in health care, social insurance and pensions. In the US, simultaneously, public expenditure has increased, new regulations have been introduced for business, social security reform has stalled, and economic policy is more Keynesian than in decades.
The US is still economically freer than most European countries, but the direction of development matters – not just the level. The current policy debate in the US leaves little hope for further free-market reforms. To the extent that economic matters are discussed, the agenda seems tilted towards more government stimulus, more government in health care, higher taxes and less foreign trade. It seems that John McCain has to make efforts to hide his free-market views rather than put them on center stage. Though Europe has statist and protectionist voices too, the focus of debate and policy now is largely on reforms – even in France.
Europe and the US have, to a large extent, similar needs of reform and they face similar challenges in today’s globalised world. But where most of Europe is on the right track, the US seems increasingly derailed, searching for solutions and leadership. Perhaps the institutional competition in Europe following the reforms in Eastern and Central Europe was the crucial factor that pushed Europe in the reform direction.
A European economic dawn doesn’t have to imply American economic dusk – they could both be strong – but it seems a likely scenario for the years to come.
Johnny Munkhammar is Senior Fellow, European Enterprise Institute, Author, The Guide to Reform
