The Power Of Europe

Name this superpower: its "miracle economy" dominated the world for a decade, before the miracle was exposed as a mirage. Stocks tanked. A housing bubble threatened to burst. Billions in business investments that had looked so smart in the boom were exposed as a waste. The money men, so recently envied pop heroes, were hunted down as criminals. The uniquely cozy fraternity of bankers and businessmen, once seen as a source of national strength, was attacked as corrupt. Yet economists continued to believe this country would dominate the next decade, too. The superpower is, of course, America today, and Japan little more than a decade ago. "Unquestionably," says a recent commentary from Standard & Poor's, "the parallels are eerie."

From the U.S. Federal Reserve to major Wall Street investment banks, economists spent this summer debating whether the United States could follow Japan into a period of stagnation and deflation--and the answer was almost always no. There is an abiding faith that America is now so quick to change, it can't fall into a Japanese funk.

But one doesn't have to assume the worst to begin questioning America's future dominance. After all, economists failed to fore-see the rise of not only of the United States in the 1990s and Japan in the 1980s, but OPEC in the 1970s and Germany in the 1960s. Now, under all our noses, there is an emerging economy more populous than the United States, nearly as wealthy and saddled with far less of a post-bubble hangover. "Why not Europe?" says Martin Hufner, chief economist of Germany's HypoVereinsbank. "Two years ago I gave a speech in Washington on the 'Coming Decade of Europe,' and everyone looked at me like I was crazy. Now I get a more thoughtful response."

Europe, argues Hufner, has been the most dynamic region in the world over the past decade. In 1992 no one would have believed that Europeans would so soon submit themselves to the rule of one central bank, or scrap their currencies for a newly minted paper called the euro. All the daily squabbling within Europe tends to obscure the fact that it is achieving its historic aim: to end the threat of world wars by uniting its former antagonists in a United States of Europe. Why is it, asked German diplomat Klaus Scharioth recently, that the world fails to recognize "this European miracle"?

The pace of change in Europe is critical to its coming dominance. No one doubts that Europe needs to scrap a thousand old traditions and rules in order to unleash its full economic potential. In the Anglo-Saxon world, the revolutionary reforms during the conservative era of Reagan and Thatcher carried through to the neoliberal era of Bill Clinton and Tony Blair, setting the stage for the miracle economy of the later '90s.

The same consensus for reform is starting to take hold on the Continent. Under socialist leader Gerhard Schroder, Germany has dropped corporate tax rates to 40 percent, level with the United States. What's more basic than taxes? Polls show that neither the French nor the Germans are as afraid of reform as the stereotype of "Old Europe" suggests, and governments are pushing ahead regardless. Under socialist Prime Minister Lionel Jospin, France has begun a process some call "stealth" reform by, for example, spinning the privatization of Air France as mere "opening up."

The notion that Europe was too slow to enter the Internet age, and will never catch up, is gospel in many quarters. Yet some economists (like Bradford DeLong of the University of California, Berkeley) now say Europe looks much like America in 1992--poised for a "productivity miracle." In an almost uncanny way, European spending on information technology mirrors American patterns of exactly 10 years ago, both as a percentage of GNP (about 2.8 percent) and in plans for the future. European firms say they plan to raise IT spending as much as 45 percent by 2005, which would follow the upward arc of spending by U.S. firms in the first four years of the Internet boom. Moreover, Europe has a ripe opportunity to learn from American errors of excess: overspending, overstaffing, overdoing everything involving the Internet. Forrester Research predicts a more sober tech recovery will help Europe "close the IT productivity gap with the U.S."

Today's gloomy global markets tend to assume that the coming expansion of the European Union will somehow slow its economy. True, West Germany slowed after reuniting with an angry, poor East Germany immediately following the fall of the Berlin wall. Ten years later, Western Europe is about to welcome emerging tiger economies that are growing faster than it is. Hungary, the Czech Republic and Poland are expected to grow at a 4 to 5 percent rate over the next 10 years, which would lift the average of Europe as a whole. Sure, there are lingering dysfunctions in these post-communist states, but so what? Peter Cornelius, director of the competitiveness program at the World Economic Forum, says, "A tiger state does not necessarily mean that everything is in order; that was certainly not the case in Asia, either."

It certainly wasn't. For those who think China will be the story of 2012, consider this. If Europe has a problem with weak banks and labor mobility--and it does--China faces the possible collapse of its biggest banks and labor revolt. China's not a contender. Moreover, the full expansion of the EU from 15 to 28 members would raise its total population to about 550 million, offsetting both China's market bulk and a coming population explosion in the United States, which wouldn't reach 550 million till at least 2050.

One more myth: the euro has been weak because global markets, in their wisdom, see a dark future for Europe. In fact, says Hufner, the euro is already the issuing currency for one third of all bonds sold worldwide. What's holding back the euro are central banks, which are reluctant to hold any new currency. (The euro accounts for only 13 percent of all national reserves.) As the euro is accepted more widely, Hufner argues, it will bring huge economies of scale to European markets by simplifying cross-border deals of all kinds, ultimately raising European GNP growth by as much as 1 percent a year.

In short, look closely and it's hard to believe the stereotypes of Europe as an Information Age laggard burdened by age, the East, the euro and above all a deep unwillingness to change. For the past 20 years, Europe has been looking inward, solving the mechanics of unifying a continent torn by war. Over the next five years, Europe will finish work on a new continental constitution, creating a newly powerful head of state with the clout to assert Europe's voice in global economic debate with the United States. He's not elected yet, but the front runner in the rumor mill is British P.M. Blair.

As if the French would ever accept Blair, you say? Don't underestimate the emerging European mind. At the European Central Bank, chief Wim Duisenberg always introduces the national directors as so-and-so "from Europe." In a recent World Economic Forum poll of its own Global Leaders of Tomorrow, 92 percent said they saw their "future" identity as mainly or partly European, not national. In April, the World Economic Forum recently invited 1,000 Europeans between the ages of 18 and 25 to Copenhagen to inject the voice of youth into the constitutional debate. They proposed a "full-fledged European government" with a directly elected president and an open welcome to all aspiring EU members, including Muslim Turkey. If you don't think Europe is beginning to look outward, think again.