PARIS: The 1990s have been Europe’s Janus decade. Having dispatched communism, much of the Europe that rests east of the Elbe faces strong growth and a brighter future. Europe’s western half, however, is facing darkness. Economic growth is at its lowest since World War II, averaging a scant 1.3% since the decade began. Prolonged slump imposes not only mass unemployment, but stagnant wages, increased poverty, and rising inequality. Europe’s bright hopes for the future have dimmed.
Aggravating the Continent’s defeatist outlook is a realization that the proposed cures seem as bad as the disease. All imply that Europe can no longer build on the legacy of its glorious postwar decades, that time when its peoples secured both economic growth and high social equality. Today, Europe is told it must choose between one or the other. The path to the future, it is said, starts by marching backwards.
Europe’s future, however, may not be as dark as is feared. Achieving growth rates equal to those of the postwar decades may be unrealistic, but resigning oneself to a sterile status quo is an unnecessary surrender. It is also dangerous to social cohesion and democracy. To really cure Europe’s ills, policies must attack the source of infection: the dominance that lenders now hold over borrowers in financial markets.
This dominance was established over the the last 16 years. As globalization of financial markets and the emergence of newly industrialized countries fueled demand for credit, the anti-inflationary monetary policies implemented in the early 1980s restricted its supply. This put lenders in the driver’s seat. They could push up interest rates, hence profits, without fear. As a result, real interest rates are stuck at unprecedentedly high levels for the longest duration in the history of Western capitalism.