Fixing Europe's Growth Engine

For the past two decades, Europe has lived by a series of economic fictions. A unified market would boost growth. A single currency would boost growth. An expanded European Union extending East would boost growth. Yet the bitter truth is that euro-unification, centralization, and expansion have done little to close the growth gap between Europe and

America, much less Europe and China. As the U.S. turned in a blistering third-quarter economic growth rate of 7.2%, the euro-zone was barely moving along at 0.3%. So disappointing has the European economic performance been that Sweden recently voted not to join the euro zone.

And no wonder. The periphery of Europe -- Britain, the Netherlands, Spain, Finland, and Ireland -- has outperformed the core for years. In fact, take out Germany, France, and Italy, and Europe's growth rate pretty much parallels that of the U.S. Why? Smaller, up-and-coming countries have made their economies much more flexible by tackling heavy unemployment, trimming pension entitlements, taxes, and regulations, and promoting entrepreneurialism.

The cyclical global upswing that's now under way will certainly help raise overall European growth. But a BusinessWeek/Global Insight Inc. study shows that if Europe's core followed the example of Europe's periphery, it could revitalize its economy and boost growth substantially for the long term. The key to Europe's economic future lies not in bigness or grandness but in being able to respond to a dynamic global economy. Europe needs to let a thousand Nokias bloom.

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