The European Economic Model

The European growth model has been an engine for economic convergence during the past few decades and has delivered prosperity to hundreds of millions of people on the continent, says a new World Bank report “Golden Growth: Restoring the Luster of the European Economic Model”, launched today in Brussels. The newreport looks at long-term growth in Europe, paying special attention to the last two decades, and identifies what needs to be done to assure continued prosperity in the decades ahead. It assesses the six principal components of the European growth model: trade, finance, enterprise, innovation, labor, and government. Its main findings: most countries in Europe are doing well in trade and finance, many in enterprise and innovation, but few are doing well in labor and government. So Europe needs many changes to make governments and labor markets work better, fewer changes to foster innovation and productivity growth in enterprises, and fewer changes still to reform finance and trade. Stalled productivity, declining populations, and unsustainable fiscal imbalances have made many changes urgent.* To revitalize the European growth model, the report makes three sets of recommendations: restart the convergence machine that has allowed poorer countries become high income economies; rebuild “brand Europe” that has helped the region, with one-tenth of the world’s population, account for a third of the global economic output; and reassess what it takes to remain the world’s lifestyle superpower, with the highest quality of life on the planet.
Between 1950 and 1973, Western European incomes converged towards those in the United States. Then, until the early 1990s, the incomes of more than 100 million people in the poorer southern periphery—Greece, southern Italy, Portugal, and Spain—converged to those of advanced Europe. Starting with the first association agreements with Hungary and Poland in 1994, another 100 million in Central and Eastern Europe were absorbed into the European Union. Another 100 million in the candidate countries in Southeastern Europe are now benefiting from the same aspirations and similar institutions that have helped almost half a billion people achieve the highest standards of living. If European integration continues, the 75 million people in the Ukraine and other countries of the Eastern Partnership will profit in similar ways.Trade and financial integration are two of the strongest attributes of the European economic model. According to the report, the adjustments needed to strengthen these components are: better management of financial flows, quicker expansion of the modern services trade, and greater mobility of workers.
Europe is known for its combination of engineering and design. Since the mid 1990s, while Asia had a financial crisis and recovery and the United States had a technology boom and financial crisis, European enterprise has flourished. With few exceptions, every part of Europe has seen a growth in employment, productivity, and exports. But during the last decade, two growing shortfalls in productivity are threatening Europe’s global economic influence. The first is that since the mid-1990s, labor productivity in Europe’s leading economies has fallen relative to the United States and Japan. The productivity gap between advanced Europe and the United States today is more than twice what it was in the mid-1990s. The second is that enterprises in southern Europe have become less productive. To be competitive, productivity should have grown by about 3-4 percent each year during the 2000s. Instead, it fell by about 1 percent each year.