links for 2007-03-26
DeLong Smackdown Watch!

The European Economy Since 1945

Sheri Berman on Barry Eichengreen's The European Economy since 1945:

The European Economy Since 1945: Eichengreen argues that the key to understanding Europe's initial triumphs and later troubles lies in recognizing that the recipe for growth varies.... In the years after 1945, Europe needed to recover from the war and catch up with the United States. This involved what economists call "extensive growth"... increasing the number of workers doing familiar kinds of jobs. Extensive growth requires adopting existing technology, using labor more efficiently and generating high levels of investment. After the war, Europe developed a variety of institutions well suited to these tasks. Large trade unions, employer organizations and corporatist arrangements.... Unions agreed to hold down labor costs and in return were given either representation on corporate boards (Germany), influence over government planning and policy making (Sweden and France... providing workers with generous benefits to offset their wage restraint and the unemployment generated by industrial restructuring. Schools and training programs.... Banks developed long-term relationships with their corporate clients....

All this worked just as it was supposed to, generating prosperity across the continent. By the early 1970s, however, the potential for extensive growth had been largely exhausted.... At this point, Eichengreen says, "the continent had to find other ways of sustaining its growth. It had to switch from growth based on brute-force capital accumulation and the acquisition of known technologies to growth based on increases in efficiency and internally generated innovation."... The problem, of course, was that Europe was now saddled with institutions ill suited to the creativity and flexibility that intensive growth demands.... [T]he same structures and practices that had led to the continent's golden age have now produced a malaise....

So what should the nations of Europe do now?... Eichengreen suggests that international competition is compelling Europe to abandon its distinctive model and become more flexible. This will not be easy. Eichengreen himself stresses the difficulty of institutional change.... Yet thanks to political will and creative policymaking, as Eichengreen points out, some countries on the continent, particularly the Nordic ones, have managed to adapt successfully. They are keeping themselves internationally competitive even while continuing to provide social benefits in health, education and social insurance far above American standards. Others, like France and Germany, will have to follow their lead. Otherwise, they will probably face the decline the pessimists have long been predicting.