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Europe’s Uneven Growth Challenge

A year ago, the euro zone’s most important challenge was anemic economic growth. But 2006 turned out to be a good year for growth in Europe, as surprising strength in exports sparked unexpected increases in domestic demand. Germany, the euro zone’s biggest economy, had a particularly dramatic turnaround, with annual GDP up by 2.7% in 2006, the highest rate since 2000.

Not only has German resurgence raised overall growth in Europe, but it has also made growth less evenly balanced throughout the euro zone. This is because Germany is growing faster than the other large economies, France and Italy.

Germany accomplished this feat by dramatically re-structuring its corporate sector. From 2001 to 2005, there was a “silent revolution” in Germany. While observers and commentators focused on the economy’s slow overall growth, behind the scenes, largely unnoticed, important changes were taking place.

Without fanfare, German workers accepted longer hours without increases in pay. This allowed Germany to improve its competitive position in world markets vis-à-vis the other large euro-zone economies, where there were no productivity revolutions, silent or otherwise.