Rewriting Europe’s Economic Story
On the eve of the 50th anniversary of the Rome Treaty, which represents the founding of the European economic community, Europe has much to be proud of - uniting nation-states to overcome old rivalries, defeat communism, and extend peace, security, and the rule of law to Eastern Europe. Europe’s economic successes - integration, the euro, and prosperity - will be celebrated along with Europe’s political successes. Such achievements are unparalleled in history. Yet, amid the hoopla many will no doubt confuse Europe’s prosperity for economic growth, which despite the recent cyclical upswing is not doing so well. Europe may have a great story of economic renewal since World War II, but that story’s lost its luster.
According to a recent Eurochambres study, the United States reached the current EU level of GDP per capita over two decades ago, a staggering finding that should be a shot across the bow for European policy-makers. The report found similar gaps in performance between the EU and the U.S. in terms of employment, productivity and R&D investments. There are a variety of explanations for this - some point to Europe’s “social market model” and others cite the U.S.’s market-friendly labor policies, to name a few.
The U.S. growth story goes something like this. The U.S. economy offers low barriers to entry for new firms, fluid labor markets, deep and risk-tolerant capital markets, and strong university-industry links that ease the flow of new ideas into the marketplace that encourages the creation of new enterprises and entrepreneurs. While continental Europe is dominated by well-established firms, the U.S. distinguishes itself by a kind of “entrepreneurial capitalism” where new firms introduce radical innovations that help drive growth. Think Netscape, Google, and Genentech all of which were initiated by university faculty and student entrepreneurs.
Europe’s story is a bit different. The creation of the European Coal and Steel Community among six nations launched what would become the European Union. Economic integration through trade, investment and harmonized rules has generated shared prosperity. Here growth is driven by the state, not the entrepreneur. Despite Europe’s wealth, some European business leaders see their governments as stifling opportunities for entrepreneurs. Europe may be rich, but it’s not creating, not growing. Julie Meyer, Chief Executive of Ariadne Capital, a London-based investment firm, and co-founder of First Tuesday, an international network of entrepreneurs states that “the Continent (perhaps excluding Britain) basically has no growth story…Many people believe that the conclusion is foregone – that Europe will slowly become a museum with the richest poor people in the world.”
Perhaps instead of adopting the intellectual legacy of Adam Smith, European continentals have accepted Rousseau’s notion that commerce cripples society and the individual. U.S. politicians frequently link America’s progress with values of freedom and choice and the pursuit of market opportunities by the individual. Counterparts in Europe, such as Edouard Balladur, former French prime minister, ask “What is the market? It is the law of the jungle, the law of nature. And what is civilization? It is the struggle against nature.” Research by Stefan Theil, Transatlantic Fellow at the German Marshall Fund, has revealed that some European school curricula and textbooks openly advance anti-capitalist views, such as that economic growth leads to poor health and disease, globalization is dangerous, and the reforms of Margaret Thatcher and Ronald Reagan resulted in chaos and despair.
However, let’s not generalize too much. There are pockets of intense entrepreneurship in Europe - mostly on the periphery - in the U.K., Ireland and the Nordic countries. European firms such as Nokia (Finland), Ryanair (Ireland) and Skype (Estonia) along with visionary venture capitalists are helping recast the image of the European entrepreneur. While national data reflect poorer performance and lower rates of entrepreneurship compared to the U.S., at the regional level entrepreneurs are thriving all over the continent. Policy may be turning a corner too. The construction and occupation of incubators and science parks in Europe is skyrocketing and EU policy-makers are rethinking school curricula to encourage an entrepreneurial mindset, support for small and medium-sized firms (SMEs), and how to ease the regulatory burden on entrepreneurs.
Nevertheless, it would appear much of Europe is only slowly - if at all - embracing the entrepreneur as a driver of growth or for that matter the lessons of supply and demand in the classroom. Updating Europe’s economic narrative will require more than rewriting text books. Europe’s challenges over the next 50 years – globalization, climate change, terrorism, and maintaining liberal democracy – will not be a costless affair. New sources of innovation, technology, and growth must be nurtured to help finance these efforts. European leaders should use the Rome Treaty festivities later this month to refresh Europe’s narrative and pay homage to its entrepreneurs which are succeeding against all odds. Reframing the political discourse in favor of entrepreneurs could pave the way for unleashing Europe’s growth potential.
March 23rd, 2007 at 2:22 am
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