‘Porridge together is better than pork cutlets alone.’ This is the philosophy of the residents of a Stockholm commune who have opted out of the rat race to pursue a life of simple pleasure. These bearded, long-haired idealists share everything: their bodies (open relationships, experiments with lesbianism, ‘airing’ their vaginas in the kitchen), their possessions (Abba LPs, root vegetables, a battered Volkswagen van), their leisure time (the children’s favourite game is playing ‘Pinochet’ by taking it in turns to torture and be tortured), and their conflicting interpretations of Marxist-Leninist thought (the biggest debate is whether or not washing up is bourgeois).1 But Erik, Gustav, and Lena, whose communal life is depicted in Lukas Moodysson’s gentle film Together, are gradually forced to give up on their idealism. The arrival of newcomers and the ravenous demands for consumerism of the younger generation erode the community’s values: the vegetarianism is relaxed, the ban on television eased, and eventually each of the inhabitants abandons communal life in favour of material wealth. Is this a metaphor for the European Union, whose attempts to create a paradise on earth for the existing generation are being threatened by globalization, a demographic time bomb, and sluggish economic growth?
Many Americans see the European economy as the business equivalent of a hippy commune – mired in the 1970s, unable to reform because of the cacophony of voices that erupt every time a decision needs to be made, and more interested in soft-headed ideas of quality of life than economic performance. They argue that it will not succeed until it emulates the USA with lower taxes, less social protection, a smaller state, and a narrow focus on shareholder value.
There is just one problem with this conventional wisdom – it is not supported by the facts. Sweden is no longer the country of Björn Borg, Abba, Pippi Longstocking, bad porn movies, and worse haircuts. Its new economic icons are world-beating companies like Ikea, Ericsson, Volvo, Saab, Absolut Vodka, Astra Zeneca, and Hennes & Mauritz. Its vital statistics are the envy of the world, with 75 per cent of the population in employment and steady growth through the 1990s.2 But, unlike America, it continues to have low levels of inequality, high tax levels, strong trade unions, and a large public sector.
Sweden is not alone: many European countries have outperformed the USA on a whole series of indicators ranging from competitiveness and employment to R&D and innovation. In just ten years Finland has moved from being a sleepy agricultural backwater – dependent on the Soviet Union for most of its markets – to leading the world in IT and mobile phones (with Nokia making up over 30 per cent of the global mobile phones market, and Linux as the only real global challenger to Microsoft).3 Ireland has gone through a similar process, leaving its agricultural past behind to become the Celtic Tiger. Holland and Denmark have had some of the best job-creation records over the last decade through the growth of part-time jobs in the service sector, higher female employment, and wage moderation. These are the economies that are already being copied by other Europeans: Germany has developed its Agenda 2010 proposals, France has launched an ambitious programme of structural reforms, while the new members from Poland to Estonia have modernized their economies at a startling pace.4
Europe’s transformative power could one day spread to the economic world. As large countries like Brazil, South Africa, India and China develop, they would do well to examine a unique economic model that combines the economies of scale of a continental market with high levels of productivity to deliver the security and equality that come from strong national welfare states.
Europe’s added value comes from the quality of life it delivers rather than its growth rates, but even on the traditional metrics of economic performance, Europe’s record is far more respectable than its American critics imply.
For the individual worker in Europe, wages have grown more than for his or her counterpart in the United States – even during the miracle decade of the 1990s. GDP per head has risen at almost the same level in Europe and America, but Americans have had to work longer hours and take shorter holidays to keep up with their European counterparts. Some commentators have even gone as far as to say that the real story of the last ten years is less one of an American economic miracle than one of American underperformance.5
In fact, many Americans have seen their wages fall even as their economy has grown. Real earnings of production workers dropped by 14 per cent in the private sector from 1973 to 1995. After a 5 per cent increase between 1995 and 1999, they trailed off again after the recession of 2001. The official Census Bureau figures show that between 2001 and 2004 the annual income of the average family fell by $1,511.6 This exposes the problem with one of the most over-cited figures in the economic world: that America’s GDP grew at an average of 3 per cent a year in the ten years to 2003 – compared to just 1.8 per cent in the eurozone.7
The truth is that this overall figure hides the fact that the growth in the US economy has been driven by a growing population rather than better economic performance. Population growth in the USA in the 1990s averaged 1.2 per cent a year compared with 0.5 per cent a year in the eurozone. This means that if you look at the average GDP per person, the US growth collapses to 2.1 per cent, narrowing the gap between the two continents to just 0.3 per cent. What is more, the EU’s underperformance can be explained by a single country, Germany, which has been struggling with the costs of reunification. This may be cheating, but if you take Germany out of the calculations, the gap between Europe and America actually disappears, leaving Europe and the USA with identical figures.8
Another misapprehension is that America’s productivity is racing ahead of the eurozone’s. Kevin Daly of Goldman Sachs argues that the level of eurozone productivity, when defined as output per hour, was only 4 per cent less than the USA’s in 2003, slightly better than the position ten years ago9 (much of this can be explained by geography, as the retail sector in America is based around out-of-town strip malls while many of the EU’s shops are on the high street).10 The reason that Americans have a greater overall output than Europeans is simple: Americans work longer hours. By 2003, annual hours worked per capita in the USA were 866 compared to 691 in the EU-15.11 Much of this difference is due to the fact that the average US worker takes only ten days’ holiday each year. In contrast, in several European countries workers average thirty days or more.12
Perhaps the most widespread myth is that America’s rise in productivity has created jobs while Europe’s has destroyed them: over the past decade total employment in the USA has expanded by 1.3 per cent a year compared to just 1 per cent in the eurozone. However, after the exclusion of Germany, the performances of the USA and the eurozone are indistinguishable over the decade, while since 1997 the eurozone has performed better (total employment rose by 8 per cent compared to America’s 6 per cent). And even that 6 per cent figure is misleading, according to an official US report, because it doesn’t account for the fact that almost 1 per cent of the US population is in prison.13 It is true that European countries fall far behind on the employment of over-55s and women, but as we will see later, several European governments have bucked the trend of early retirement and developed policies to entice mothers back into the workplace.
Above all these figures give the lie to the idea that there is a crude trade-off between employment and equality – that the only route to high employment is one of bad jobs, high insecurity, poverty pay and extreme inequalities. On the contrary, it is the countries with the most generous welfare states – Sweden, Denmark, Norway, Ireland and the Netherlands – that have the highest levels of total employment. Each one of these countries comfortably outperforms the United States. The UK, Finland, Portugal, and Austria are all on their way to catching up with the USA14 with participation rates around the 70 per cent mark. The reason for this is that they have shifted from having passive welfare states that provide a safety net for the sick to active ones that turn the State into a motor of opportunity.
The final misapprehension is that Europe’s companies are underperforming because they balance their commitment to shareholder value with responsibilities to their staff and the wider community. Many of the biggest companies in the world are in fact European: 61 of the 140 biggest companies on the Global Fortune 500 rankings come from Europe (compared to 50 from the USA and 29 from Asia).15 And in key sectors – energy, telecoms, aeroplanes, commercial banking, and pharmaceuticals – it is European companies that are setting the pace for global business. The remarkable stories of Vodafone, which is the largest wireless player in the world, and the Airbus consortium, which brought together European companies to comprehensively outperform the American Boeing Company, show that in many of the sectors of the future, the American board room is trailing Europe’s lead.16
The most powerful argument for europessimism is Europe’s falling birth rate. The nightmare scenario is of the European economy being gradually hollowed out as a bloated population of pensioners lives off the backs of an ever smaller pool of workers. Over-60s, as a proportion of the population of conventional working age, have increased from 20 per cent in 1960 to 35 per cent in 2000. The figure is forecast to grow to 47 per cent in 2020 and 70 per cent in 2050, leading to a European Commission forecast that annual growth could decline from around 2 per cent to 11/4 per cent by 2040.17
But the fact that demographers have spotted a trend does not mean that it will lead inexorably to disaster: most demographic predictions – dating right back to Thomas Malthus and his apocalyptic visions of the rise in population leading to mass starvation – have been wrong. And there are many signs that today’s merchants of doom will be mistaken. After years of a falling birth rate, Sweden, Denmark, Norway, Britain, and France are showing signs of a reverse while others are learning from their example. Italy, Germany, and Spain (three of the countries with the lowest birth rates) are now introducing financial and fiscal incentives to couples to produce more children. And as the Scandinavian and French examples show, the provision of adequate maternity (and paternity) rights and childcare facilities can have an even more dramatic effect than financial or fiscal incentives.
The pensions debate has also become misleading. Every study has shown that the simple move of raising the retiring age can immediately remove the ticking time bomb of growing dependency ratios.18 The European Commission forecasts that if member-states succeed in raising the average retirement age by five years from sixty to sixty-five, without raising benefits, the cost of Europe’s pension system would remain stable.19 This is a painful political challenge, but it is one that all European governments are already grappling with, through pension reforms – many based on a Swedish template – that will reduce the fiscal pressures from population ageing and encourage longer working lives.
Another partial solution to Europe’s demographic dilemma is the move towards supporting ‘managed migration’ that has taken hold across Europe. All European countries are now ending their blanket ban on economic migration and developing criteria for admitting labour migrants based on qualifications or salary. Unskilled labour will be admitted according to seasonal need, when shortages can be acute, thereby avoiding incentives for illegal trafficking.
What is more, it is not just Europe that faces this problem. Academics show us that once the economy develops, literacy rates improve, women become empowered and then fertility drops. Thus Chinese growth could be undermined by its ageing population. In the USA the problem is currently mitigated by a higher birth rate and immigration, but it is questionable whether the latter can continue forever (not least in the current geo-political climate). The key is to find ways to stabilize dependency ratios. Europe is one of the first continents to grapple with these issues, and has already had some success in offsetting the problem.
There are three reasons why the European project should make us more optimistic about the European economy in the future.
The first is the euro, which could allow the EU to accrue some of the benefits that the dollar’s pre-eminence has afforded the United States. In many ways, the dollar is the dirty secret behind the US economic miracle, allowing the lonely superpower to finance its own balance of payments deficit by selling foreigners a currency that is depreciating in value. But there are reasons to doubt that the rest of the world will tolerate America’s profligacy indefinitely. America has a current account deficit of 5 per cent of GDP while the euro area has a surplus. American households now save less than 2 per cent of GDP compared to 12 per cent in the eurozone, and total household debt stands at 84 per cent of GDP (compared to 50 per cent in the eurozone). This is not sustainable – as the economist Herstaein has argued, ‘things which can’t go on forever usually don’t’.
Although the US dollar still accounts for approximately two thirds of all official currency reserves, there is a definite trend away from it and towards the euro. Several countries have already converted some or all of their reserves into euros. At the moment, the euro only makes up 18.7 per cent of official global foreign exchange reserves, to the dollar’s 64.5 per cent, but the trend is that the euro is making up an ever increasing share. There are approximately 150 countries in the world that have exchange rate regimes tied to an anchor or reference currency: 51 currently use the euro, or have the euro as a major part of their reference basket.20
These still make up a small percentage of the world’s currencies, but the shift to the euro is accelerating: Russia increased its euro reserves in 2003 to approximately 25 per cent of its total reserve of $65 billion, and China has also recognized the growing importance of the euro as a reserve currency. Towards the end of 2003 rumours were circulating that the OPEC countries were considering switching the pricing of oil into euros, since the continued weakness of the dollar was substantially hurting their revenues and forcing them to increase production. Such a switch in currency pricing for the world’s largest physical commodity (12 per cent of world trade) would contribute significantly in raising the euro’s status to that of the world’s leading international currency through its increased use as a medium of exchange. The big change will occur when Asian central bankers shift some of their reserves into euros, something which is very much on their agenda according to an executive at a City institution whose clients include several Asian central banks. Romano Prodi told me that when he first met the Chinese President Jiang Zemin, his Chinese interlocutor was fascinated by the euro. Apparently, his parting words were: ‘We will switch our reserves to the euro for two reasons. Why? First because we believe in multipolarity. Second, because it will be good business.’
If the euro emerges as a global reserve currency, it will give the countries of the Eurozone much greater control over their economic futures. Europe will probably not mimic the American model of using its status as one of the world’s bankers to finance a huge current account deficit, but a massive injection of capital into the European economy would undoubtedly stimulate demand.
As the Nobel Prize-winner Robert Mundell argues: ‘The advent of the euro may turn out to be the most important development in international monetary arrangements since the emergence of the dollar as the dominant currency shortly after the creation of the US central bank, the Federal Reserve System, in 1913…the euro area could easily contain as many as 50 countries with a population exceeding 500 million and a GDP substantially larger than the United States within a decade.’
The second reason to be optimistic about Europe’s economy is energy. The European Union is far ahead of America and Asia in the race to end its dependence on natural resources – to make it the first continent of ‘energy independence’. It understands that preserving the planet for future generations is not just an existential challenge, it also makes good economic sense.
North America is already the largest consumer of oil in the world, accounting for more than a quarter of total demand in 2001. What is more, oil demand in the USA is projected to grow by 1.7 per cent per year. Most of the growth is projected for the transportation sector, with cars and light truck fleets – including sport utility vehicles (SUVs) – being the largest consuming segment of the sector.
Europe, on the other hand, has been leading the world in the shift to renewable sources of energy. It already accounts for only 3,176 million tonnes of CO2 emissions compared to America’s 6,016 million tonnes. This means that every American citizen causes three times as many CO2 emissions as a European. From January 2005, the European Union hopes to have in place the world’s biggest and most effective emissions trading scheme, covering over 12,000 energy-producing and energy-intensive plants across the EU. The scheme will offer businesses a cost-effective way of both reducing their emissions and covering the bill for action to help prevent climate change.
And many countries are well on the way to kicking the carbon habit. In Sweden, for example, only 40 per cent of energy comes from oil, with 40 per cent coming from renewable sources and 20 per cent from nuclear power. In 2000, Sweden introduced the ‘green tax shift’ which saw the country shift tax away from labour and towards energy consumption over a ten-year period. The government has also issued ‘green certificates’ to stimulate production of ‘bioenergy’, wind power and solar energy.21
There is talk of adopting this certification system at the European level. The recent past has already seen a surge in oil prices that could cripple the US economy and seriously hold back the development of China and India, and the future is likely to be even worse. Analysts estimate that between 2000 and 2020 China’s energy consumption will rise by 3.8 per cent a year; while US consumption will go up by 1.4 per cent per year. With its current low levels of consumption, and increases predicted at a modest 0.7 per cent per year, Europe may soon reap the rewards of its ‘energy independence’.22
Possibly the biggest boon to European economies is the European project itself. Europe’s economic strength rests on two pillars: the overall size of its economy which assures it power in the world, and the quality of living standards it can deliver for its citizens. Both have been improved by the continuing integration and enlargement of the European Union.
The impact of the creation of the Single Market in 1992 has already been dramatic. The European Commission estimates that European Union’s GDP in 2002 was almost 2 per cent higher than it would have been without the creation of the internal market, while employment was almost 1.5 per cent higher. The single market has also led to a doubling of Foreign Direct Investment in the EU, and the competition has forced prices for consumers down to record levels (with air prices falling by over 40% and phone prices by over half).23
The impact of enlargement could be equally transformative. The European Commission estimates that the fact of enlargement alone will increase the GDP growth of the new members by between 1.3 and 2.1 percentage points every year, while enlargement will add an extra 0.7 per cent a year to the existing members’ growth rates.24
A study by Goldman Sachs argues that within half a century, the Chinese, Indian, Brazilian, and Russian economies will be bigger than any of the European economies in the G7 (America, Japan, Germany, France, Britain, Italy, and Canada). Today, their combined GDP (at market exchange rates) is one-eighth of the output of the G6.25 But the study concludes that the total output of the four economies will overtake that of the G7 in less than forty years.26
This has led to predictions of Europe’s economic irrelevance in the twenty-first century. But the report simply shows how misleading it is to extrapolate the economic future without taking European integration into account. Europe’s strength in the world comes from the collective weight of the European economy (which will continue to grow as the EU enlarges) rather than the size of its component economies. The reason that Germany, France, and Britain can negotiate trade as equals with the United States is not because they are in the G7 but because they are in the European Union. It is possible that the relative size of each of these countries’ economies will be smaller in 2050 than it is today, but it is likely that the European Union as a bloc will be even bigger as the Union grows to absorb its neighbouring countries.
If the ten new members close the gap between their standard of living and the Western European one, in the same way that Ireland, Spain, and Portugal did after they joined, it will have a massive tonic effect on the European economy. A study by Lehman Brothers argues that such a growth in the economies of the accession countries could lead to a scenario where ‘notwithstanding its ageing population, with the right policies, Europe could actually see its weight in the world economy increase over the next 15 years. By 2020, the EU could have a lead over the US of about 45%.’ And a Europe with fifty members will be an even more serious economic player than the Euro-25.27
But the success of an economic model goes beyond the size of GDP: it depends on its ability to attract others and through that to set the rules for the global economy.
The real costs of the American economic model are becoming ever clearer. Professor Robert Gordon of North-western University shows that the size of the American GDP hides the fact that much of it is going into unproductive things:
If you add all these ‘sunk costs’ into the mix, Gordon argues that although Western Europeans only work three-quarters as much as Americans, they get ninety per cent of the return, coupled with far more equal income distributions and lower poverty rates.28 In the future, Europe might not keep up with the voracious consumption of an American economy that puts growth above all else, but the European economic model is robust enough to pay for a quality of life for European citizens that is among the best in the world.
All European countries today are reforming their economies for an age of economic interdependence, while trying to keep the best features of the European social model intact. They could be said to converging around a ‘Stockholm Consensus’, as the Swedish state has pioneered so many of these new approaches. The ‘Stockholm Consensus’ amounts to nothing less than a new social contract in which a strong and flexible state underpins an innovative, open, knowledge economy. This contract means that the state provides the resources for educating its citizens, treating their illnesses, providing childcare so they can work, and integration lessons for newcomers. In exchange, citizens take training, are more flexible, and newcomers integrate themselves.
The ‘Stockholm Consensus’ stands in opposition to much of the waste of the ‘Washington Consensus’: low levels of inequality allow Europeans to save on crime and prison; energy-efficient economies protect them from hikes in oil prices; the social contract gives people leisure and a helping hand back into work if they lose their jobs; while the European single market and the euro will allow European countries to benefit from economies of scale in a global market without giving up on the adaptability and dynamism that come from being small.
In many parts of the world – from Beijing to Brasilia – countries that have been through periods of rapid economic growth are now focusing on how to deliver a better quality of life for those at the bottom of the pyramid. The sociologist Amitai Etzioni offers a cultural explanation for this resistance to the American business model in many parts of the world: ‘While the Western position is centred around the individual, the focus of Eastern cultures tends to be towards a strongly ordered community.’
In other words, if the United States represents the ultimate symbol of a rights-based culture and a focus on individual wealth, Asia is more interested in the idea of ‘responsibility’ and the creation of common good. Europe, through the ‘Stockholm Consensus’, can offer the best of both worlds; a synthesis of the dynamism of liberalism with the stability and welfare of social democracy. As the world becomes richer and moves beyond satisfying basic needs such as hunger and health, the European way of life will become irresistible.