Economic growth – Restructuring success

By 1957 the artillery emplacements in New Brighton, defending the strategically vital harbour of Liverpool, had been dismantled. Although small children still played on Merseyside’s remaining "bombies" - bomb sites left after the air raids on the port - the physical relics of the Second World War were disappearing, as they were across western Europe.

In the same year, in West Berlin, a visitor could already detect early signs of what would be dubbed West Germany’s "economic miracle". A short drive past the Brandenburg Gate into the Russian zone of the city revealed just how much progress was being made in the west. It also laid bare the emerging disaster of the East German economy. But it would be a generation before the true significance of these two contrasting realities would be indelibly imprinted on the consciousness of the populations of a divided continent.

So, 12 years after it had been reduced to ashes and rubble, in 1957 Western Europe’s post-war economic renaissance was under way. Statistics illustrate how daunting would be the task of attaining the living standards then already being enjoyed by the United States.

In 1950, gross domestic product (GDP) per person, adjusted for purchasing power parity, was $9,573 in the US, $4,281 in Germany, $5,221 in France, $6,847 in the UK and $1,843 in Japan.

In 1992 the figures were $21,558 (US), $19,351 (Germany), $17,959 (France), $17,412 (UK) and $19,425 (Japan).

Today, GDP per person (not adjusted for purchasing power parity) stands at $41,700 in the US. For the euro area it is $30,000. So, much of the gap with the US has been closed in the past 50 years. But what about the next half century?

Are those who are arguing that the catching up process with the US had already stalled a decade or more ago correct? Will the burden of demographic ageing and an alleged lack of economic dynamism mean that Europe’s living standards will stagnate relative to America’s and Europe’s economic influence erode, as the new giants of economic globalisation, Brazil, Russia, India and China - the so-called BRICs - bulk larger in the world economy ?

Take the comparison with America first. In its latest economic survey in January, the Organization for Economic Co-operation and Development estimated that potential GDP growth per person was now running at around 1.5% for the euro area for 2005-10, compared with 1.8% for the US. Worse, by 2020-30, the euro area’s long-term growth potential would have fallen to only 0.4% while the US figure would be 1.6%.

On the face of it, for Europe, these figures are damning. But are they painting too rosy a picture of US prospects and too bleak a picture of Europe’s? These are, after all, economies which have access to comparable levels of technology, the real driver of long-term economic growth. The strength of Europe’s broad scientific base is too easily underestimated. Maintaining it and commercialising it more effectively are among the EU’s biggest challenges.

As for the rapid American growth, the past decade of out-performance has been in large part the product of irresponsibly short-sighted economic, especially monetary, policies - short-term interest rates set by the US central bank have been too volatile and, for long periods, too low.

The result has been an extended debt-fuelled US consumer boom, financed by foreign borrowing, whose most visible manifestations today are a $900bn current account deficit and a mushrooming housing crisis. For almost a decade America has been living way beyond its means, at home and, since 2003, militarily, abroad. Cleaning up this unsustainable mess is going to require an extended period of slow US growth or a deep recession, coupled with a reorientation of business strategies towards export markets.

In contrast, already Europe (particularly Germany) is showing signs of a healthier economic expansion, evidence that at the corporate level more restructuring has taken place than some macroeconomists suggest.

Remember that Europe’s economy is not, like America’s, burdened by fighting an un-winnable war (the Iraq Study Group suggested the Iraq debacle could cost as much as $2 trillion), which is undermining US prestige and influence abroad and whose political and economic fallout at home remains uncertain.

Remember, too, that Washington (like Europe) is also facing ageing and social security challenges, and they will look worse as growth slows. America’s corporate-based welfare system is being eroded by the same global competitive pressures as those which are contributing to the difficulties of Europe’s more generous systems based on the nation states.

And what about those global competitive pressures? Predictions by investment bankers Goldman Sachs in 2003 that the Chinese, Indian and Russian economies could all be bigger than Germany’s within 20 years remain just that, predictions.

Even were they to be borne out, because of their vast populations, income per person in China, for example, would still be less than half EU and US levels by 2050. What the investment bankers did not address, however, was the strong possibility that growth in the BRICs might be derailed by political instability or economic or political mismanagement.

Given their increasing weight in the world, a political, economic or military shock originating in the BRICs, particularly in Russia or China, would pose a severe challenge to the EU and the US. The probability of such an unwelcome event happening in the next 50 years must be judged high.

The immense economic value of the solid foundations for peace, political stability and social cohesion, laid down in 1957 in Rome, do not show up directly in economic statistics. Their value is being too readily underestimated by too many of Europe’s friends and critics alike.

• Stewart Fleming is a former US bureau chief of the Financial Times.

By 1957 the artillery emplacements in New Brighton, defending the strategically vital harbour of Liverpool, had been dismantled. Although small children still played on Merseyside’s remaining "bombies" - bomb sites left after the air raids on the port - the physical relics of the Second World War were disappearing, as they were across western Europe.