Europe’s economies

Competition for the title of “sick man of Europe” has been stiff for the past few years. The problem: how to stay competitive with rigidly regulated labor and services markets. Crafting monetary policy for a currency zone that includes Ireland’s boom and Italy’s bust was a troublesome affair.

After the gloom, sunshine now seems to be breaking through all over. Industrial production in Europe rose by 1% in December compared with the month before, and by 4% for the year as a whole, much better than anticipated. Foreign trade rose briskly too. The future looks brighter still.

The European Commission released its interim forecast for 2007 which suggests that the European economy as a whole will grow by 2.7% this year substantially exceeding its earlier estimate of 2.4%.

Even with its new found strength, however, Europe is barely outstripping America. The chairman of the Federal Reserve, anticipates a slowdown to more sustainable growth rates of 2.5 – 3 % in America’s immediate future roughly the same pace that is exciting Europeans.

Edmund Phelps, winner of the 2006 Nobel Prize for economics argues that the structural explanation for Europe’s slower growth rates masks deeper problems with dynamism. There is less churn in the top ranks of companies, and employees are given less latitude to innovate.

In part the problem is economic institutions; regulatory barriers to entrepreneurship, a financial system that favors insiders, and a high level of input from labor, which tends to be biased towards the status quo. But cultural differences that might impede Europe’s growth even if those regulatory barriers are swept away: workers in Europe’s big economies are less likely to regard the opportunity for innovation, autonomy and interesting work as vital components of a job.

A professor of economics at Berkley has just published a book arguing that Europe is very good at “extensive growth” roughly,
producing more of what we already know how to make and less good at “intensive growth”, which involves finding new pro-ducts and new ways of doing things. Europe’s “coordinated capitalism” served the first task well and better than the messily undirected market, but has balked at pushing back.