Europe's economy is clearly on the upswing: growth forecasts run at 3 per cent and even higher rates are quite possible. The world economy looks better and even inside Europe, demand is rising.
Plenty of reason, therefore, to be optimistic: say good-bye to global crisis, forget the risk of a stagnant Europe. But there is even more good news, promising perhaps to turn the current upswing into something more durable. For this, thank the often abused euro, for it has anchored the once profligate nations of the Mediterranean in German-style monetary discipline. But the most interesting new fact in European economics is surely the belief, hope, and perhaps reality, of economic restructuring on a variety of fronts. Governments have undertaken a few privatisations with radical consequences for competition. Take the case of Deutsche Telecom and the price wars it has incited. Young people are increasingly recognising the dramatic importance of modern information technology and are finding their way both to the Internet and the Neumarkt, Germany's bid to inspire American-style venture capitalists. Big companies, too, are in the game. Europe is abuzz with mergers not only to take advantage of Europe's broader economic space but also to confront tough competition in world markets.
In smaller countries, too, appropriately downsized in terms of scope and excitement, a lot is happening also. Just what does all this mean for European growth and prosperity? Could it be that despite all the gripes about the American model, a little imitation of the American success story is now underway in Europe? No! Such claims are vastly overstated, the beginnings are relatively minor; privatising telecoms is accomplished in every third world country and does not make them rich overnight; getting on the Internet is routine from Bolivia to China. As to corporate mergers, it remains to be seen how many are simply the vanity plays of bosses who do not face tough stockholder scrutiny. Three reasons stand out as to why all this is not transforming Europe fast and deep. First, it takes a long time to change an economic culture and existing business organisations from mere administration to profitable management.
Next, European governments remain mostly uncooperative, nowhere more so than in Germany. The Kohl government did nothing to reform and the Schroder government is equally lazy. It talks, and talks but shies away from decisive moves to change the economic landscape.
oder talks like Tony Blair, but neglects the fact that Britain had a decade of Thatcherism before turning to "New Labour." Worse, a country where 70 per cent of the members of parliament are teachers and bureaucrats, as is the case in Germany, cannot hope to get dramatic legislative change. The cultural orientation of bureaucrats and teachers is deeply anti-market, anti-risk taking and in love with the status quo. No chance of a regulatory revolution here. There is another reason to be circumspect on the pace of change in Europe. Unlike the United States, Northern Europe has a culture not of entrepreneurship, experimentation, risk taking and deal making. Rather, the state tells everyone what to do, the state and business authorities tell everybody what position to play. Of course, there are exceptions, but the dominant mode is a passive one: "Nobody told me to". All this sounds pretty pessimistic but is not meant to be; it is meant to calibrate that change takes a lot of time, more so if it is tentative and reluctant. But change is taking place at last and, who knows, it might just become a new wave. Europe has accomplished an extraordinary move forward with the euro, so why not in other areas?
The euro was not a politically expensive step to take, except in Germany where it ran into every sort of prejudice. What must follow for Europe to become dynamic will be much harder because a lot of toes need to be stepped on as an inefficient status quo is jettisoned. Normally, crisis brings the legitimacy needed for dramatic moves, but Europe is not in crisis; hence the slow pace of progress. But there is one great source of optimism: today Germany is the loser in Europe, viewed by the French and even Italians as the losers overweight and immobilised by bureaucracy and regulation. Germany had its turn at the head when hard money was the issue of the day; today it is trailing because the restructuring mode does not accord well with its traditions of pay without work and disciplined followers without courageous leadership.
Nothing better could happen to Europe than just this discussion; perhaps it generates the kind of shock that propels more ambitious changes forward. In the meantime, the significant upturn in growth makes radical change far less important and it is a short step from there to putting change on the back burner.
Rudi Dornbusch is Ford Professor of Economics at Massachusetts Institute of Technology and a former chief economic adviser to both the World Bank and IMF.
