Going for Growth Europe’s Successes, Europe’s Dilemmas

Policy makers on both sides of the Atlantic are wracking their brains about what to do with their historically high debt mountains. The Europeans are taking an approach to reduce their debt that involves a Germanic dose of financial rigor and austerity, first applied in Greece and now in the other Southern European countries as well. Germany has been nagging the other Europeans to get their houses in order: cut spending and entitlements, and raise taxes. But some of its Southern neighbors, notably Spain, are beginning to baulk. In the United States in contrast, the FED’s loose monetary policy has led to historically low long term interest rates that have reduced the cost of the debt mountain in the economy (while reducing returns to savers), and got the country back on a growth path, albeit one with anemic job creation. The US debt mountain is still there, although the people in Washington seem to hope that the magic of economic growth will make the mountain magically disappear. So it seems the Europeans favor austerity, the Americans growth and financial repression. But no matter which approach they are taking to tackle their debt, policy-makers on both sides of the pond are very much aware that the reduction of unemployment and the restoration of sustainable public finances all point to one Holy Grail, a necessary (but unfortunately not sufficient) condition: the developed world needs robust economic growth. They are now reviewing the nature and sources of past growth, to learn lessons which could help in the current situation. One example of such a review is the World Bank’s new study on the European experience with growth (just been published in a report entitled Golden Growth ), undertaken at the request of the Polish authorities when they assumed the Presidency of the European Union in July 2011. The World Bank’s long term perspective on the European growth engine furnishes some particularly rich insights, not only on the historical sources of growth in Europe but also on the quality of this growth. At a time when it is common to hear Europeans talk about the need for a new growth model in the European economic zone, it is useful to think also about the aspects of the old growth model that are worth keeping, and what should be thrown out on the trash heap of history. It is worth remembering that per capita economic growth and the improvement of people’s living standards over the long term is quite a recent historical phenomenon. For very long period until the late 18^th century, global per capita income hardly rose at all. With some exceptions, in what was essentially an economy based on subsistence agriculture, any increase in crop yields (mostly brought about by climatic warming periods) was soon offset by higher population growth, as much due to lower infant mortality as to increased female fertility. Population growth then eroded per capita income and brought the world’s population back to the “Malthusian Trap’ of static living standards . It seemed to the vast majority of people that things would not change very much over their lifetime and that one’s grandparents’ lot was one’s own. The Industrial Revolution changed all that: not only did real incomes start to vary for the first time (some increasing and some declining, creating winners and losers in the economy), but mentalities started to change too. By the end of the 19^th century and especially in the 20^th people began to strive to be better off than their grandparents and expected their grandchildren to be better off than themselves. …