Europe: Don't Blow The Big Chance

Continental Europe's battered economies are finally on the mend. Rock-bottom interest rates and a weak Euro have re-started growth and massive corporate restructuring has boosted productivity. Next year, there is a good chance that Euro-zone gross domestic product will expand faster than America's for the first time since 1992. Even Wim Duisenburg, the European Central Bank's cautious president, says he is optimistic.

All the pieces are in place for a strong cyclical upswing. But if policymakers play their cards right they could turn the coming recovery into something far more exciting--the beginnings of a U.S.-style New Economy expansion, in which sustained growth goes hand in hand with low inflation, heady productivity increases, and tumbling unemployment. That's an alluring prospect. Joblessness in the euro zone is still above 10%--more than twice as high as it is in the U.S. And because of structural rigidities, inflation typically rears its ugly head on the Continent well before annual GDP growth rates reach the magic 3% level needed for large-scale job creation.

Business people have been telling the politicians for years what they have to do. First, they must sweep away the outdated Welfare State rules that make it prohibitively expensive for companies to hire and fire workers. Then they should slash punitive social security contributions, and cut taxes on options and other incentives that companies in the U.S. and U.K. use to reward good performance and promote entrepreneurship.

Such ideas are anathema to many powerful interest groups, including the trade unions--most of which support the center-left governments that are in power in nine out of the 11 euro zone countries. But in an era of globalization, rising international competition, and rapid technological change, there is no alternative. That's why Germany's Social Democratic Chancellor Gerhard Schroder is forging ahead with plans to cut taxes and reduce the state's role in the economy. Despite his ideological inclinations, he knows that Germany must change. This is Europe's big chance. It would be tragic if the politicians flubbed it.

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